Inheritance Tax 7-Year Rule Gifts UK 2026: PETs, Taper Relief, and Everything You Need to Know
Gifts become fully exempt from IHT after 7 years — but taper relief does NOT reduce the gift value; it only reduces the tax rate in years 3-7. And taper only saves money when the gift exceeds the nil-rate band. Here is exactly how it all works.
The Most Common Myth: Taper Does NOT Reduce the Gift Value
Taper relief only reduces the IHT rate. A £500k gift is still valued at £500k if the donor dies in year 6 — the taper saves IHT by charging 8% instead of 40%, but the gift value itself is unchanged.
| Years Since Gift | IHT Rate on Failed PET | Taper Saving | Example (£500k gift, no NRB available) | Key Point |
|---|---|---|---|---|
| 0–3 years (died within 3 years of gift) | 40% | None — full IHT rate | Gift £500k. NRB available: £0 (used by other gifts). Chargeable: £500k × 40% = £200k IHT. No saving from taper. This is the most dangerous zone — taper gives zero benefit in the first 3 years after a gift. | Taper relief provides NO saving in years 0-3. The full 40% rate applies. Many people think the 7-year rule gives a sliding scale from day one — it does not. Only surviving past year 3 triggers any taper benefit. |
| 3–4 years (died between 3 and 4 years after gift) | 32% | 20% discount on the IHT charge | Gift £500k. NRB available: £0. Chargeable excess: £500k. IHT without taper: £200k. IHT with taper: £500k × 32% = £160k. Saving: £40k. Note: this taper only applies IF there is chargeable excess above the available NRB. If the gift falls within NRB: IHT = £0 regardless (no taper needed). | 3 years is the first significant survival milestone. Surviving past 3 years reduces the IHT rate from 40% to 32% on the failed PET. |
| 4–5 years | 24% | 40% discount | Gift £500k. NRB: £0. IHT: £500k × 24% = £120k. Saving vs no taper: £80k. | Each additional year of survival past year 3 reduces the IHT rate by a further 8 percentage points. |
| 5–6 years | 16% | 60% discount | Gift £500k. NRB: £0. IHT: £500k × 16% = £80k. Saving vs no taper: £120k. | At year 5, the IHT rate on a failed PET is reduced to 16% — 60% less than the standard 40% rate. |
| 6–7 years | 8% | 80% discount | Gift £500k. NRB: £0. IHT: £500k × 8% = £40k. Only £40k IHT on a £500k gift — vs £200k if the donor died in year 0-3. | Years 6-7 offer the greatest single-year taper saving. Surviving to year 7 eliminates all IHT. The estate should monitor the precise anniversary date — dying shortly before 7 years costs significant IHT. |
| 7 years or more (donor survived 7 years) | 0% — fully exempt PET | 100% exempt — no IHT | Gift £500k. Donor survived 7yr. IHT: £0. Gift is no longer a PET — it is fully outside the estate and does not appear on the IHT400. | After 7 years, the gift is permanently removed from the estate with no IHT. The executor need not declare it on IHT403. Starting the 7-year clock as early as possible is the most powerful gifting strategy available. |
| NRB covers the full PET (regardless of years) | 0% (NRB absorbs the gift) | N/A — no IHT regardless of taper | Gift £200k. NRB available: £325k (no other gifts). Chargeable excess: £0. IHT: £0 — regardless of when the donor died or whether taper would apply. NRB always comes before taper. | If the PET is within the available NRB, taper relief is irrelevant — the NRB absorbs the gift entirely. Taper only matters when the PET exceeds the NRB. Many people overestimate taper's value: for most modest gifts, the NRB itself eliminates IHT on a failed PET. |
IHT 7-year rule taper relief UK 2026. PET: s3A IHTA 1984 — Potentially Exempt Transfer; gift from individual to individual (or to bare trust or A&M trust); 7yr clock from date of gift. Taper relief: s7(4) IHTA 1984 — reduces IHT RATE (not gift value) on failed PETs; only applies if chargeable excess exceeds available NRB; years 0-3: 40% (no taper); 3-4: 32%; 4-5: 24%; 5-6: 16%; 6-7: 8%; 7+: exempt. NRB: £325,000 (s8C IHTA — frozen to April 2030). Cumulation: NRB allocated to failed PETs in chronological order (earliest first); remaining NRB applied to death estate. 14yr rule: CLTs (ss2,3,7 IHTA — gifts to discretionary trusts) made 7-14yr before death can consume NRB for PETs in 7yr before death; CLTs themselves not re-taxed beyond 7yr. Gift valuation: date of gift (not death) — s160 IHTA. Loss on sale: s131 IHTA — if donee sells for less than gift value, IHT can be recalculated on lower sale proceeds. GWR (Gift with Reservation): s102 Finance Act 1986 — no 7yr clock; asset stays in estate if donor retains benefit. Full market rent exception: s102B FA 1986 — paying full rent converts GWR to PET from date rent commences. POAT: Finance Act 2004 Sch 15 — income tax on pre-owned assets. Annual exemption: s19 IHTA £3k/yr (carry-forward s19(2) one year only) — deducted from gift before PET calculated. Gifts with reservation: donor must vacate gifted property or pay full market rent for 7yr clock to run. IHT403: gifts declared on IHT403 if made within 7yr of death. CLT immediate charge: s7 IHTA — 20% above NRB; top-up to tapered rate on death within 7yr with credit for 20% paid.
The 7-Year Rule: Complete Guide
What is a Potentially Exempt Transfer (PET) and how does the 7-year rule work?
A Potentially Exempt Transfer (PET — s3A IHTA 1984) is a gift that is 'potentially' exempt from IHT — meaning it becomes fully exempt if the donor survives 7 years from the date of the gift. Any gift from one individual to another individual is a PET, provided it is not a gift to a discretionary trust (which is a Chargeable Lifetime Transfer, or CLT, immediately subject to IHT). Gifts to bare trusts (where the beneficiary has an immediate, unconditional right to the trust assets) are also PETs. The 7-year rule: from the date of the gift, a 7-year clock starts running. If the donor survives the full 7 years: the PET is fully and permanently exempt from IHT. It drops out of the cumulation calculation and is not declared on the IHT400. If the donor dies within 7 years: the PET 'fails' and is brought back into the estate for IHT purposes. It is valued at the date of gift (not the date of death). The full or tapered IHT rate is charged on the PET, taking into account the NRB. The NRB (£325,000) is applied first against earlier gifts in the 7-year period (in chronological order — earliest first). A PET is only chargeable to IHT to the extent it exceeds the available NRB. The practical significance of the 7-year rule: for someone with a large estate who starts making significant lifetime gifts, each year that passes moves closer to those gifts becoming fully exempt. The strategy of 'getting the clock ticking early' is the most widely used IHT planning technique available to UK individuals.
Taper relief — the biggest misunderstanding about the 7-year rule
Taper relief (s7(4) IHTA 1984) is one of the most misunderstood aspects of UK IHT law. Most people believe that the 7-year rule provides a sliding reduction in the value of the gift (or the amount counted in the estate) over time. This is wrong. Taper relief reduces the RATE of IHT charged on a failed PET — not the chargeable value. The gift is always valued at its full value at the date it was made, regardless of when the donor dies. Taper applies only to the IHT rate and only in years 3-7. Years 0-3: IHT rate = 40% (no taper saving at all). Years 3-4: IHT rate = 32%. Years 4-5: IHT rate = 24%. Years 5-6: IHT rate = 16%. Years 6-7: IHT rate = 8%. Years 7+: fully exempt. Second critical point: taper only saves IHT when the failed PET exceeds the available NRB. If the PET falls within the NRB, the IHT is already zero — taper cannot reduce it below zero. In practice, taper relief is only relevant for large failed PETs (above the NRB). For someone who made a gift of £200k and had a full NRB of £325k available: the gift is covered by the NRB; IHT = £0; taper is irrelevant. For someone who made a gift of £600k with no NRB available (already used by earlier gifts): the entire £600k is charged at the tapered rate. The IHT saving from taper in years 3-7 can be substantial for large gifts, but it is zero in years 0-3 and zero if the gift is within the NRB.
NRB cumulation and the allocation of the nil-rate band to failed PETs
The nil-rate band (NRB — £325,000, s8C IHTA 1984, frozen to April 2030) is shared across all chargeable transfers in the 7 years before death. When a PET fails, the NRB is allocated to gifts in chronological order — earliest first. The effect: if a donor made multiple gifts, the earliest gifts get the NRB first. Later gifts only benefit from the NRB if earlier gifts have not already used it up. Example: gifts: (Year 1) £200k PET; (Year 3) £250k PET. Donor dies in Year 4. NRB available: £325k. NRB allocation: Year 1 PET gets £200k of NRB → remaining NRB = £125k. Year 3 PET: £125k covered by remaining NRB; £125k chargeable at 32% (tapered rate — Year 3 gift, donor died in Year 4 = 1-2 years later → 3-4 years since Year 3 gift: actually wait, donor died in Year 4, Year 3 gift was made 1 year before death → 0-3yr taper = 40%). IHT on Year 3 PET: £125k × 40% = £50k. The NRB at death is also shared with the estate itself — after allocating the NRB to all failed PETs (earliest first), whatever NRB remains is available for the death estate. This means heavy lifetime gifting within the 7-year window can leave no NRB for the death estate.
The 14-year rule — CLTs made 7-14 years before death affect the NRB
A Chargeable Lifetime Transfer (CLT — a gift to a discretionary trust) is immediately chargeable to IHT at 20% at the time of the gift (above the NRB). CLTs also run a 7-year clock. If the donor dies within 7 years of a CLT, additional IHT may be charged (top-up from 20% to the applicable tapered rate — with a credit for the 20% already paid). The 14-year rule: CLTs made between 7 and 14 years before death can affect the NRB available for failed PETs in the 7 years before death — even though those CLTs are NOT themselves subject to additional IHT on death. The mechanism: when calculating IHT on a failed PET, the NRB must take into account ALL CLTs and PETs in the 7 years BEFORE that PET was made. A CLT made 10 years before death that was made 3 years before the PET in question (which was made 7 years before death) will be in the cumulation window for the PET — and will use up the NRB for the PET. Example: Year 1 (14yr before death): CLT £400k to discretionary trust → 20% IHT paid on £75k (above NRB); Year 7 (7yr before death): PET £300k; Year 14 (death). The CLT was made 7 years before the PET → it IS in the 7-year cumulation window for the PET. The NRB available for the PET: £325k - £400k (CLT) = £0 → entire £300k PET is chargeable (at applicable tapered rate — donor survived 7 years from PET → PET is now exempt, but the NRB erosion affects other PETs). This is the 14-year rule: gifts made up to 14 years before death can affect the IHT calculation on failed PETs — not because they are themselves re-taxed, but because they use up the NRB for later gifts.
Common mistakes and practical points on the 7-year rule
Several common mistakes about the 7-year rule cost families significant IHT: (1) Valuation at date of gift: a house gifted for £300k that is now worth £500k — IHT (if PET fails) is on £300k (date of gift value), not £500k. But loss on sale relief: if the gifted asset was sold by the donee for LESS than the date-of-gift value, IHT may be recalculated on the lower sale price (s131 IHTA). (2) Gift with Reservation (GWR — s102 FA 1986): if the donor continues to benefit from the gifted asset (e.g., continues living in a gifted house rent-free), there is NO 7-year clock. The asset stays in the donor's estate regardless. The pre-owned asset tax (POAT — Finance Act 2004 Schedule 15) may also apply. (3) Starting the clock immediately: every year of delay is a year wasted. Making the gift earlier gives a longer runway to the 7-year exemption. (4) Annual exemption s19 IHTA (£3k/yr) deducted first: the annual exemption (£3k this year, £3k carry-forward from previous year if unused = up to £6k total) is deducted from the gift value before the PET figure is determined. Only the net PET amount is subject to the 7-year rule. (5) Gifts that are immediately exempt (s19-s23 IHTA): annual exemption, small gifts (s20 — £250/recipient), wedding gifts (s22), normal expenditure from income (s21), spousal/charity gifts — these are NOT PETs; they are immediately exempt; no 7-year clock. (6) Life insurance to cover the risk: if the donor may die within 7 years, a decreasing term insurance policy (covering the tapering IHT risk) written in trust can protect the beneficiaries from an unexpected IHT bill. The premium itself (if from surplus income) may qualify as normal expenditure from income (s21 IHTA — immediately exempt).
Frequently Asked Questions
What is the 7-year rule for inheritance tax gifts?
The 7-year rule means that a gift from one individual to another individual (a Potentially Exempt Transfer, or PET — s3A IHTA 1984) becomes fully exempt from IHT if the donor survives 7 years from the date of the gift. If the donor dies within 7 years, the gift fails and is brought back into the estate for IHT. The value is calculated at the date of gift (not death). Taper relief (s7(4) IHTA) reduces the IHT rate (NOT the gift value) for gifts where the donor survived 3-7 years: years 0-3 = 40% (no saving), years 3-4 = 32%, years 4-5 = 24%, years 5-6 = 16%, years 6-7 = 8%, years 7+ = 0% (exempt). Taper only reduces IHT when the failed PET exceeds the available NRB (£325,000 in 2026/27).
Does taper relief reduce the value of a gift for IHT?
No — taper relief (s7(4) IHTA 1984) reduces the IHT RATE on a failed PET, not the value of the gift. The gift is always valued at the date it was made, regardless of how many years later the donor dies. Taper reduces the rate from 40% to 32% (years 3-4), 24% (years 4-5), 16% (years 5-6), or 8% (years 6-7). Taper also only saves IHT when the failed PET exceeds the available NRB — if the gift is covered by the NRB, there is no IHT to taper. For a gift of £300k with a full NRB of £325k available: IHT = £0, regardless of taper. For a gift of £700k with no NRB: taper saves £200k × 40% = £80k in years 4-5 (24% rate vs 40% rate).
What happens to inheritance tax if the donor dies within 3 years of making a gift?
If the donor dies within 3 years of making a PET (s3A IHTA 1984), the full 40% IHT rate applies — there is no taper saving at all. The gift is brought back into the estate at its date-of-gift value and charged at 40% on any amount exceeding the available NRB (£325k). Example: gift of £500k with no NRB available; donor dies 2 years later; IHT = £500k × 40% = £200k — exactly the same as if the gift had never been made. Years 0-3 are the most dangerous zone for failed PETs: the donor has lost control of the asset but the full IHT rate still applies. Planning: life insurance (decreasing term, written in trust) can protect beneficiaries from the IHT cost if the donor dies in this window.
Can I give away my house and avoid inheritance tax after 7 years?
Only if you stop living in it. If you give your house to your children but continue to live in it rent-free (or at below-market rent), this is a Gift with Reservation (GWR — s102 Finance Act 1986). With a GWR: (1) the 7-year clock does NOT start; (2) the property stays in your estate as if you still owned it; (3) there is no IHT saving. To start the 7-year clock you must actually vacate the property (or pay full market rent — s102B FA 1986). If you pay full market rent: the gift becomes a PET on the date you start paying rent, and the 7-year clock starts from that date. The pre-owned asset tax (POAT — Finance Act 2004 Schedule 15) may also apply as an income tax charge if you use a GWR property. For the gift to be effective for IHT: give the property AND move out. The 7-year clock then starts from the date of the gift.
What is the 14-year rule for inheritance tax?
The 14-year rule in IHT affects the NRB available for failed PETs in the 7 years before death when there were also CLTs (gifts to discretionary trusts) made 7-14 years before death. The mechanism: when calculating IHT on a failed PET, the NRB is reduced by any CLTs made in the 7 years BEFORE that PET. A CLT made 9 years before death was made 2 years before a PET made 7 years before death — so the CLT is within the 7-year cumulation window for that PET. It uses up the NRB for the PET, leaving less (or nothing) for the PET to benefit from. The CLTs themselves are not re-taxed on death (they are beyond 7 years) — but they consume the NRB for later gifts. The 14-year rule does NOT apply to failed PETs — only CLTs can create this extended lookback effect. Understanding this is critical for anyone who has made gifts to discretionary trusts followed by gifts to individuals.
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