Inheritance Tax 7 Year Rule UK: How PETs Work, Taper Relief, and What Gifts Are Covered (2026)
The 7-year rule means gifts to individuals are free of IHT if the donor survives 7 years. If not, taper relief reduces the IHT rate from 40% (years 0-3) to 8% (year 6-7). Taper only saves tax where the gift exceeds the NRB (£325,000) — below that, no taper is needed.
| Years Survived | IHT Rate on Gift | Taper Reduction | Taper Note | Example: £500k Gift (NRB £325k → Taxable £175k) |
|---|---|---|---|---|
| 0 to 3 years | 40% | 0% (no taper) | Full IHT rate applies if donor dies within 3 years of the gift | Gift £500k; NRB £325k; taxable gift = £175k; IHT = 40% × £175k = £70,000 |
| 3 to 4 years | 32% | 20% off | Taper kicks in at exactly 3 years (3 years and 1 day after the gift) | Gift £500k; NRB £325k; taxable gift = £175k; IHT = 32% × £175k = £56,000 (saving £14k vs yr 0-3) |
| 4 to 5 years | 24% | 40% off | Survivor is 4 years into the 7yr period | IHT = 24% × £175k = £42,000 (saving £28k vs yr 0-3) |
| 5 to 6 years | 16% | 60% off | 5 years and 1 day after the gift | IHT = 16% × £175k = £28,000 (saving £42k vs yr 0-3) |
| 6 to 7 years | 8% | 80% off | 6 years and 1 day — one year to go | IHT = 8% × £175k = £14,000 (saving £56k vs yr 0-3) |
| 7+ years | 0% | 100% — fully exempt | PET is permanently exempt; never counted in the estate; clock complete | IHT = £0 — full £70k saving achieved; gift permanently outside estate |
PET: potentially exempt transfer (s3A IHTA 1984) — outright gift from individual to individual; no IHT if donor survives 7yr; chargeable if donor dies within 7yr. Taper relief: s7(4) IHTA 1984 — reduces IHT RATE (not gift value) on the taxable part of the gift (excess above NRB). Taper only relevant where gift (or cumulative gifts in 7yr window) exceed the NRB (£325,000 in 2026/27). IHT on gift valued at DATE OF GIFT (not date of death). Multiple gifts: NRB used by earliest gifts first (s7(1) IHTA — cumulation). Donee (recipient) liable for IHT on failed PET (s199 IHTA); estate also liable. Gift inter vivos insurance: decreasing term policy written in trust; covers IHT risk during 7yr period. Immediately exempt (NOT PETs): normal expenditure from income (s21 IHTA — uncapped); annual exemption s19 (£3k/yr); small gifts s20 (£250/person); wedding gifts s22 (£5k/child, £2.5k/grandchild, £1k other); charity gifts (s23 IHTA). CLTs (gifts to discretionary trusts): NOT PETs; chargeable at 20% immediately if above NRB; GWR (s102 FA1986): retained benefit → not a genuine gift for IHT.
The 7-Year Rule: Complete Guide
What is a PET and which gifts are covered by the 7-year rule?
A potentially exempt transfer (PET) is defined in s3A IHTA 1984 as a transfer made by an individual to another individual (or to certain trusts for disabled persons). The key categories: (1) Cash gifts: any amount of cash given outright from one person to another — the 7-year clock starts on the date the donor's bank debits the funds; (2) Property gifts: gifting land or buildings — the 7-year clock starts on the completion date (the date the TR1 is registered at the Land Registry); (3) Investment gifts: shares, unit trusts, OEICs — the clock starts on the date of the stock transfer form; (4) Personal possessions: jewellery, art, antiques, cars — the clock starts on the date of physical delivery or the date of a deed of gift. What is NOT a PET: (a) gifts to discretionary trusts — these are chargeable lifetime transfers (CLTs), taxable at 20% in lifetime if above the NRB (£325,000); (b) gifts subject to a condition that must be fulfilled before it is effective; (c) gifts where the donor retains a benefit (GWR — s102 FA1986 — these are not even treated as genuine gifts); (d) gifts made on death (legacies in the will — these are transfers on death, not PETs). Pre-gift exemptions that reduce the PET amount: the annual exemption (s19 IHTA — £3,000/yr; carry-forward 1yr = £6,000), the small gifts exemption (s20 — £250/person/yr), and wedding gifts (s22 — £5,000/child) reduce the value of the gift for PET purposes BEFORE the 7-year clock consideration. Normal expenditure from income (s21 IHTA) is COMPLETELY OUTSIDE the PET framework — it is immediately exempt (no PET, no 7-year clock) if the three conditions are met.
How taper relief works — and when it matters
Taper relief (s7(4) IHTA 1984) reduces the IHT rate on a PET that becomes chargeable (because the donor died within 7 years). Critical points: (1) Taper reduces the IHT RATE, not the value of the gift. The gift is always valued at the date of the gift (the value on the day the gift was made). If a property was worth £300,000 when gifted and is worth £500,000 at the date of death, the IHT is based on £300,000 — but only if no retained benefit; (2) Taper ONLY HELPS if the gift exceeds the NRB. If a person made a single gift of £200,000 (below the NRB of £325,000), taper is irrelevant — no IHT is due anyway because the gift is within the NRB. Taper only makes a difference where the cumulative PETs and CLTs in the 7 years before death (taken chronologically) EXCEED the NRB. Example: person gives £500,000 to daughter; NRB = £325,000; taxable gift = £175,000 (excess above NRB); in year 4 after the gift, donor dies. Taper relief (year 4-5): IHT rate = 24%; IHT on £175,000 = £42,000. Without taper (if died in year 2): IHT = 40% × £175,000 = £70,000. Taper saved £28,000. (3) Who pays the IHT on a failed PET: the recipient of the gift (the donee — the child who received the money) is technically liable for the IHT on a failed PET (s199 IHTA 1984). In practice, executors often pay the IHT from the estate and deduct from the beneficiaries' shares. A deed of gift or letter of wishes can specify who is to bear the IHT cost.
The NRB cumulation rule — how multiple gifts interact
Where a person makes multiple gifts over several years, the NRB is used up by the earliest gifts first (s7(1) IHTA 1984 — cumulation). The rule: all CLTs AND chargeable PETs (PETs where the donor died within 7yr) in the 7 years before death are cumulated. The earliest ones use up the NRB first. The later ones face IHT at 40% (or tapering rate) on any excess above the NRB. Example: in year 1, person gives £200,000 to a discretionary trust (CLT). In year 4, person gives £300,000 to a child (PET). In year 6, person dies with an estate of £400,000. Calculate: the CLT (£200,000) and the PET (£300,000) are both in the 7-year window. Cumulate: £200,000 + £300,000 = £500,000 total; NRB £325,000; excess = £175,000. Apply to PET (year 4 gift, year 6 death = 2 years ago — no taper): IHT on the PET (£300,000) = the part above the remaining NRB after the CLT: NRB after CLT = £325,000 − £200,000 = £125,000; taxable PET = £300,000 − £125,000 = £175,000; taper: gift in year 4, death in year 6 = 2 years before death — taper not yet applicable (0-3 yr = 40%); IHT on PET = 40% × £175,000 = £70,000. Then estate: NRB already used by £500k of CLT+PET → all of the NRB used; estate = £400,000 × 40% = £160,000. Total IHT = £70,000 (on failed PET) + £160,000 (on estate) = £230,000. Had the person survived 7 years from the CLT (year 1 gift): the CLT would have dropped out of the 7yr window; the PET would have survived (year 4 + 7yr = year 11 — donor died in year 6 = only 2yr after the PET — PET still fails). But: NRB not used by the CLT (dropped out of window); NRB fully available for the PET; taxable PET = £300,000 − £325,000 = £0; IHT on PET = £0; estate IHT = 40% × (£400,000 − £325,000) = £30,000. Planning implication: making large CLTs early in the 7-year window means they drop out before any subsequent PETs — potentially saving significant IHT.
Gifts that escape the 7-year rule immediately — s21 normal expenditure from income
Not all gifts require a 7-year wait. The following are immediately exempt and are NOT PETs: (1) Normal expenditure from income (s21 IHTA 1984): gifts that are (a) part of the donor's normal expenditure, (b) made from income (not capital), and (c) leave the donor with sufficient income to maintain their usual standard of living. This exemption is uncapped — a person with £50,000 surplus income per year can give away £50,000 per year, EVERY year, with immediate IHT exemption and no 7-year clock. The gift must be from income surplus — not from savings or capital. Evidence: HMRC form IHT403 allows executors to claim the s21 exemption on death; the donor (and executors) should maintain a record of annual income, expenditure, and gifts to substantiate the claim. (2) Annual exemption (s19 IHTA): £3,000 per person per year; carry-forward 1yr unused = £6,000. The annual exemption is set off against PETs in priority — it reduces the PET amount (so a £3,000 gift = £0 PET, not a £3,000 PET that survives 7yr). (3) Small gifts (s20 IHTA): up to £250 per person per tax year; cannot combine with s19 for the same recipient in the same year. (4) Wedding gifts (s22 IHTA): £5,000/child; £2,500/grandchild or child of the other party; £1,000/anyone else; must be given on or before the wedding date (conditional on the marriage taking place); not retrospective. (5) Charity gifts (s23 IHTA): outright gifts to registered UK charities; immediately exempt; not PETs at all. Summary: gifts from income surplus under s21 are the most powerful immediate IHT exemption — uncapped and with no waiting period.
Practical points — the 7-year clock, records, and insurance
Key practical points for the 7-year rule: (1) The date of the gift: for the 7yr clock to run correctly, the date of the gift must be precisely established; for property — the completion date of the TR1; for cash — the date the donor's bank debits the sum (keep bank statements); for shares — the date of the stock transfer form. Some donors make a formal 'Deed of Gift' for high-value gifts to provide a clear contemporaneous record of the date and amount. (2) Record-keeping: the donor should maintain a gift schedule — a spreadsheet or letter recording every significant gift made each year, the date, the recipient, and the value. This is filed with the will and given to the executors to enable accurate IHT400 completion. HMRC form IHT403 requires a 7-year gifts history on every estate. (3) Life insurance to cover the 7-year risk: many donors take out a 'gift inter vivos' policy (decreasing term insurance) at the time of the gift. The policy pays out enough to cover the declining IHT liability over the 7-year period. The sum insured reduces in line with taper relief each year. The policy is written in trust (so it pays outside the estate). This removes the financial risk that the donor dies before 7 years. (4) Annual review: a good practice is to review gifts annually — particularly the s21 normal expenditure from income position — to ensure gift schedules are accurate and that s21 conditions continue to be met. (5) PETs and insurance: if a large PET is made and the donor then contracts a serious illness in year 2, the 7-year IHT risk is now highly likely to crystallise. At this point, a gift inter vivos policy may no longer be obtainable (insurers may decline). This reinforces the importance of insuring at the TIME OF THE GIFT.
Frequently Asked Questions
What is the 7-year rule for inheritance tax?
The 7-year rule means that a gift from one individual to another (a 'potentially exempt transfer' or PET under s3A IHTA 1984) is fully exempt from IHT if the donor survives 7 years from the date of the gift. If the donor dies within 3 years, the full IHT rate (40%) applies to any part of the gift above the NRB (£325,000). Between years 3 and 7, taper relief (s7(4) IHTA) reduces the IHT rate: year 3-4 = 32%; year 4-5 = 24%; year 5-6 = 16%; year 6-7 = 8%. Taper reduces the IHT rate (not the gift value). After 7 years, no IHT is due regardless of how much was given. PETs must be outright gifts to individuals — gifts to discretionary trusts are NOT PETs and are taxed differently (CLTs — 20% immediately if above NRB).
How much can I give away before the 7-year rule applies?
Several exemptions apply BEFORE the 7-year clock: annual exemption (s19 IHTA) — £3,000 per person per year (carry-forward 1yr unused = up to £6,000); small gifts (s20 IHTA) — up to £250 per person per year (cannot combine with s19 for same recipient); wedding gifts (s22 IHTA) — £5,000/child; £2,500/grandchild; £1,000/anyone. These amounts are immediately exempt — they are not PETs and the 7-year clock never starts on them. Above these exemptions, gifts become PETs and the 7-year clock starts. Separately: normal expenditure from income (s21 IHTA) is also immediately exempt — uncapped — if the gift is from surplus income, is habitual, and leaves the donor enough to maintain their usual standard of living.
When does taper relief apply to inheritance tax?
Taper relief (s7(4) IHTA 1984) only applies when: (1) a PET becomes chargeable because the donor died within 7 years; AND (2) the gift (or cumulative gifts in the 7yr window) exceed the NRB (£325,000). If the gift is below the NRB, no IHT is due anyway — taper is irrelevant. If the gift exceeds the NRB: the rate reduces in each year: year 0-3: 40%; year 3-4: 32%; year 4-5: 24%; year 5-6: 16%; year 6-7: 8%. Taper is applied to the IHT rate on the EXCESS above the NRB — not the full gift value. Example: gift of £500,000; NRB £325,000; taxable gift = £175,000; if donor dies in year 5 (year 4-5 bracket): IHT = 24% × £175,000 = £42,000 (vs £70,000 if died in year 1).
Does the 7-year rule apply to all gifts?
No — the 7-year rule (PET exemption under s3A IHTA 1984) only applies to outright gifts from one individual to another individual (or to certain disabled trusts). It does NOT apply to: (1) gifts to discretionary trusts — these are CLTs (chargeable lifetime transfers), taxable at 20% immediately if above the NRB; (2) gifts with reservation of benefit (s102 FA1986 — GWR) — if the donor retains a benefit (e.g., continues to live in a gifted property rent-free), the property stays in the IHT estate regardless of survival; (3) normal expenditure from income (s21 IHTA) — these are immediately exempt, not PETs (the 7-year rule never even starts). The 7-year rule also does not apply to the annual exemption (s19 IHTA) and small gifts (s20 IHTA) — these are immediately exempt in full.
What happens to the gift if I die within 7 years?
If you die within 7 years of making a PET, the gift becomes chargeable. HMRC will request a 7-year gift history (HMRC form IHT403) from the executors. The gift is valued at the DATE OF THE GIFT (not at death — the value may have changed, but the IHT is based on the gift-date value). The gift uses up the NRB in chronological order (earliest first). If the gift exceeds the remaining NRB, IHT is charged at the taper rate for the year in which the donor died. The donee (recipient of the gift) is technically liable for the IHT on the gift (s199 IHTA 1984); the estate is also liable if the donee cannot pay. To avoid this uncertainty: executors should ensure gifts are documented; donees should retain the money in case IHT becomes due; or the donor takes out a gift inter vivos (decreasing term) insurance policy at the time of the gift, written in trust, to cover the potential IHT cost.
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