IHT Clawback on Gifts UK 2026: Failed PETs, Who Pays, Taper Relief, NRB Cumulation, and What Happens When a Donor Dies Within 7 Years
If a donor dies within 7 years of making a gift, IHT may be clawed back. Taper reduces the RATE — not the gift value. And the person who received the gift (not the estate) is primarily liable for paying it.
Taper Reduces the Rate — Not the Gift Value
The most common misunderstanding: taper relief does NOT reduce what the gift is valued at. A £500k gift made 5yr before death is still a £500k chargeable transfer. Taper only reduces the IHT rate (from 40% to 24% at 5yr) — the chargeable amount stays at £500k.
| Years Before Death | Taper → IHT Rate | £500k Gift (NRB consumed) | £500k Gift (NRB available) | Key Point |
|---|---|---|---|---|
| Less than 3 years before death | 0% taper → 40% IHT rate | £500k gift, NRB already consumed: IHT = £500k × 40% = £200,000 | £500k gift, full NRB available: first £325k covered by NRB; £175k × 40% = £70,000 IHT | No taper relief applies within 3 years of death. The full 40% rate applies as if the gift had never been made. The earlier you make gifts, the better — making a gift 2 years before death provides no taper benefit at all. |
| 3-4 years before death | 20% taper → 32% IHT rate | £500k gift, NRB consumed: IHT = £500k × 32% = £160,000 | £500k gift, NRB available: NRB covers £325k; £175k × 32% = £56,000 IHT | Taper begins to provide meaningful relief. A gift made exactly 3 years and 1 day before death pays 32% not 40% — saving 8pp. On a £1m gift with NRB consumed: saving = £1m × (40% − 32%) = £80,000. The precise date of the gift matters significantly near the 3yr and 7yr boundaries. |
| 4-5 years before death | 40% taper → 24% IHT rate | £500k gift, NRB consumed: IHT = £500k × 24% = £120,000 | £500k gift, NRB available: NRB covers £325k; £175k × 24% = £42,000 IHT | The taper is beginning to provide very significant relief. A £500k gift made in the 4-5yr window pays 24% IHT — compared to 40% on the estate if the gift had not been made. The gift is not yet fully exempt but the tax burden is considerably reduced. |
| 5-6 years before death | 60% taper → 16% IHT rate | £500k gift, NRB consumed: IHT = £500k × 16% = £80,000 | £500k gift, NRB available: NRB covers £325k; £175k × 16% = £28,000 IHT | By year 5-6, taper relief is very powerful. A £500k gift with NRB consumed saves £120,000 in IHT compared to year 0-3 (£200k vs £80k). But note: the donee must still pay £80k IHT — which is a substantial liability for someone who received a gift years earlier, particularly if the gift was an illiquid asset like a house or a business. |
| 6-7 years before death | 80% taper → 8% IHT rate | £500k gift, NRB consumed: IHT = £500k × 8% = £40,000 | £500k gift, NRB available: NRB covers £325k; £175k × 8% = £14,000 IHT | Year 6-7: 8% rate — only one year from full exemption. The gift is heavily tapered. Many planning strategies aim to reach the 6-7yr window quickly (e.g., completing large gifts as early as possible). At 8% rate on a £500k gift: donee pays only £40k IHT vs £200k at the 40% rate — a £160k saving from surviving just 6 years. |
| 7+ years before death | 100% taper → 0% IHT rate (fully exempt) | £500k gift: NO IHT — gift is fully outside the estate | £500k gift: FULLY EXEMPT — NRB is not consumed by this gift (it drops out of the 7yr cumulation window) | Once 7yr have passed: the gift is completely outside the IHT estate. The NRB is also freed up — gifts that have left the 7yr window do NOT consume the NRB for later gifts. This is the 'rolling' nature of the 7yr rule: as gifts age beyond 7yr, they free up NRB for subsequent gifts. Starting the 7yr clock as early as possible maximises the benefit. |
| Gift with Reservation (s102 FA 1986) — no 7yr clock runs | 40% at death — regardless of when gift was made | Property given away 10yr ago but donor lived in it rent-free: still in estate at full market value at date of death | No taper; no 7yr clock; no exemption — treated as if donor never gave it away | If the donor gave away an asset but retained a benefit in it (e.g., gave the house to children but continued living there rent-free; gave shares but continued receiving dividends as a 'loan back'), the Gift with Reservation rules (s102-s102C FA 1986) apply: the asset stays in the estate at death regardless of when the gift was made. This is the most common clawback trap. Full market rent paid to the donee removes the GWR taint. |
IHT clawback on gifts UK 2026. PETs (s3A IHTA 1984): gift from individual to individual; immediately PET at time of gift; becomes chargeable if donor dies within 7yr. Taper relief (s7(4) IHTA): 0-3yr=40%; 3-4yr=32% (20% taper); 4-5yr=24% (40% taper); 5-6yr=16% (60% taper); 6-7yr=8% (80% taper); 7+yr=0% (100% taper/fully exempt). Taper reduces the RATE not the gift value — PET always chargeable at full value (s160 IHTA — open market value at date of transfer). NRB cumulation: NRB (£325k) absorbs gifts in chronological order (earliest first); each failed PET is chargeable on the excess above remaining NRB. 14yr shadow: CLTs made 7-14yr before death reduce NRB for PETs made 7yr before death (CLT in 7yr before PET depletes NRB). Primary liability on donee (s204 IHTA) — NOT the estate; executor secondarily liable. IHT403: all gifts in 7yr before death must be reported; penalties up to 100% for non-disclosure (s247 IHTA). Gift valued at date of gift (s160 IHTA) — fall in value since gift does NOT reduce chargeable amount (except s131 IHTA land sold within 4yr of death — different provision). GWR (s102-s102C FA 1986): gift with reservation — donor retains benefit; no PET; 7yr clock does NOT run; property in estate at death value regardless. POAT (FA 2004 Sch 15): pre-owned asset tax — income tax charge in some GWR-adjacent situations. Life assurance in trust: term policy covering 7yr; can fund donee's IHT liability. Annual exemption (s19 IHTA £3k/yr): immediately exempt; not a PET. Small gifts (s20 IHTA £250/recipient): immediately exempt. Wedding gifts (s22 IHTA): immediately exempt within limits. Normal expenditure from income (s21 IHTA): immediately exempt if habitual, from income, and sufficient income remains.
IHT Clawback on Gifts: Complete Guide
What is IHT clawback and how does it work — the failed PET mechanics
A Potentially Exempt Transfer (PET — s3A IHTA 1984) is a lifetime gift from one individual to another. At the time of the gift: it is immediately and potentially exempt — no IHT is due (even if the gift is very large). The gift 'becomes' fully exempt if the donor survives 7 years from the date of the gift. But if the donor dies within 7 years: the PET 'fails' and becomes a chargeable transfer as at the date of death. The IHT is then calculated as if the gift was a chargeable transfer made at the date of death — applying the NRB, the taper rate for the year in which the gift was made, and the 40% IHT rate. 'Clawback' is not a technical legal term — in law, the PET simply 'fails to become exempt' — but it is used colloquially to describe the process by which HMRC 'claws back' the PET into the IHT calculation. The executors are responsible for reporting all gifts made in the 7yr before death on the IHT403 schedule (part of the IHT400). HMRC can enquire into the gifts and assess any IHT due on failed PETs. Failure to disclose gifts on the IHT403 can result in substantial penalties (s247 IHTA — negligence or fraud: up to 100% of the underpaid tax).
The critical myth: taper relief reduces the RATE not the value of the gift
The most common misunderstanding about IHT taper relief is that it reduces the VALUE of the gift that is chargeable — i.e., that a gift made 5 years before death is somehow valued at a fraction of its original value for IHT. THIS IS WRONG. Taper relief reduces the RATE of IHT on the gift, not the amount of the gift that is chargeable. The gift is always valued at its full amount at the date it was made (s160 IHTA — open market value at the date of transfer). Taper relief only matters if IHT is actually payable on the gift — i.e., if the NRB has been consumed by earlier gifts or by the size of the gift itself. If the failed PET is within the NRB: taper relief is irrelevant — there is no IHT to taper. Example: a gift of £200k made 5 years before death. NRB = £325k. £200k < £325k → no IHT on this gift regardless. Taper: irrelevant (0 × any% = 0). Example 2: a gift of £500k made 5 years before death. NRB = £325k. £500k > £325k → excess = £175k. IHT at 5yr taper rate (24%): £175k × 24% = £42,000 IHT — not 24% of £500k (£120k). Example 3: same gift but NRB already consumed by an earlier gift: full £500k at 24% = £120,000 IHT. The taper benefit is greatest when the NRB is already consumed by earlier gifts.
Who actually pays the IHT on a failed PET — the donee's liability shock
This is perhaps the biggest surprise for recipients of large lifetime gifts. Under s204 IHTA 1984: the PRIMARY liability for IHT on a failed PET rests with the DONEE (the person who received the gift). The executor of the deceased's estate is SECONDARILY liable. What this means in practice: if you received a £500k gift from your parent 4 years ago and they die today — HMRC can come to you directly and demand IHT on that gift. The executor of your parent's estate would normally handle the IHT400 and calculate the IHT on the failed PET — but if the estate cannot pay, HMRC will pursue the donee personally. The donee's liability is limited to the value of the property received (or the net amount if they have since spent part of it). Practical problem: if the gift was a house (now worth £400k after falling from £500k), the donee has an illiquid asset and a potential IHT bill — but only £400k of asset to fund it from. If the gift was cash that has since been spent: the donee still has a personal liability for the IHT (up to the original gift amount received). Protection: some donors insure against dying within 7 years by taking out a term life assurance policy (written in trust) to cover the potential IHT liability on a large PET — the policy pays out if the donor dies within 7yr, providing funds for the IHT without adding to the estate.
NRB cumulation — how earlier gifts can increase the IHT on a later failed PET
The NRB is available for each person's cumulative chargeable transfers in the 7 years before death. Gifts in the 7yr period are cumulated in CHRONOLOGICAL ORDER — earliest gifts consume the NRB first. A failed PET may have NO IHT due if it falls within the remaining NRB — but if earlier gifts have consumed the NRB, the full failed PET is chargeable. The '14-year rule' (sometimes called the cascading NRB problem): if a donor made a Chargeable Lifetime Transfer (CLT — e.g., into a discretionary trust) 7-14 years before death, that CLT may not appear in the 7yr cumulation window. BUT: that CLT still reduces the NRB available for PETs made in the 7yr before death. The NRB for PETs is calculated by subtracting any CLTs made in the 7yr before the PET (not the 7yr before death). This creates what is sometimes called the '14-year shadow'. Example: a CLT of £200k was made into a trust 9 years before death. A PET of £500k was made 3 years before death. 7yr before death: no CLT in window. NRB for PET: £325k − £200k (CLT in 7yr before PET) = £125k NRB remaining. IHT on failed PET: £500k − £125k = £375k at 40% (3yr taper: no taper) = £150,000 IHT. Without the prior CLT: IHT = (£500k − £325k) × 40% = £70,000. The prior CLT effectively increases the IHT on the PET by £80,000.
Practical steps — what executors must do when the deceased made large gifts
When a person dies and has made large lifetime gifts, the executor faces additional IHT obligations: (1) Identify all gifts: gather bank statements, gift records, solicitor files, share transfer documents, deeds of transfer for the 7yr before death. Ask family members — informal gifts may not be documented. HMRC expects full disclosure on IHT403. (2) Value the gifts: PETs are valued at the date of the gift (s160 IHTA — open market value at transfer date). For property: a retrospective valuation may be needed. For shares: mid-market price on the date of the gift. (3) Calculate the cumulation: list all gifts chronologically; apply the NRB; calculate any taper on failed PETs. (4) Notify donees: donees who may face IHT liability should be notified early — they need to know a liability may arise and should not have spent all the gift. (5) Include on IHT400: all failed PETs must be reported on IHT403 (Gifts and other transfers of value). Intentional omission can result in HMRC penalties of up to 100% of additional tax. (6) Check for GWR: review whether any apparent PETs were actually gifts with reservation (s102 FA 1986). If the donor retained a benefit: the gift is NOT a PET; the property is in the estate regardless of when the gift was made. (7) Life assurance payout: if the deceased had a term policy (written in trust) to cover PET IHT liability, the policy proceeds may be available to meet the IHT on the failed PETs — these proceeds pass outside the estate and are not themselves subject to IHT.
Frequently Asked Questions
What is IHT clawback on gifts?
IHT 'clawback' refers to what happens when a person makes a lifetime gift (a Potentially Exempt Transfer — PET, s3A IHTA 1984) and dies within 7 years. The PET 'fails' to become exempt and becomes chargeable to IHT as at the date of death. IHT is calculated on the gift at the taper rate for the year in which it was made. The taper reduces the RATE of IHT — not the value of the gift. Rates: 0-3yr: 40%; 3-4yr: 32%; 4-5yr: 24%; 5-6yr: 16%; 6-7yr: 8%; 7+yr: 0%. The primary liability for IHT on a failed PET is the DONEE (recipient) — s204 IHTA 1984. The executor is secondarily liable. Gifts must be reported on IHT403 (part of IHT400). Failure to disclose attracts penalties up to 100% of the additional tax (s247 IHTA).
Does taper relief reduce the value of the gift or the IHT rate?
Taper relief (s7(4) IHTA 1984) reduces the RATE of IHT on a failed PET — NOT the value of the gift. The gift is always chargeable at its full value at the date it was made (s160 IHTA — open market value at date of transfer). Taper relief only applies if IHT is actually payable on the gift (i.e., the NRB has been consumed by the gift or by earlier gifts). If the failed PET falls entirely within the remaining NRB: no IHT is due and taper is irrelevant. Example: gift of £500k made 5 years before death; NRB fully consumed by earlier gifts. Chargeable: £500k. IHT at 5yr taper rate (24%): £500k × 24% = £120,000. NOT £500k at a 'discounted' value of £300k (60% taper of value) — a common mistake.
Who pays inheritance tax on a failed PET gift?
The PRIMARY liability for IHT on a failed PET (gift that becomes chargeable because the donor died within 7 years) is the DONEE — the person who received the gift (s204 IHTA 1984). HMRC can pursue the donee directly for the IHT on the gift they received. The executor of the deceased's estate is SECONDARILY liable. In practice: the executor calculates the IHT on all failed PETs (via IHT403) and the estate typically meets the liability from estate assets — but if the estate cannot pay, the donee is personally liable up to the value of the gift they received. Practical implications: someone who received a £500k gift 4 years ago and the donor has just died should expect a potential IHT bill of up to £160,000 (32% taper rate with NRB consumed). Life insurance written in trust (taken by the donor at the time of the gift) can provide the donee with funds to meet the IHT liability.
What is the 14-year rule for IHT on gifts?
The '14-year rule' (or '14-year shadow') arises from the NRB cumulation rules. The NRB (£325k) is available against cumulative chargeable transfers in the 7 years before death — but for PETs, the NRB is further reduced by any Chargeable Lifetime Transfers (CLTs — gifts into discretionary trusts) made in the 7yr before the PET. If a CLT was made 9 years before death and a PET was made 3 years before death: the CLT falls outside the 7yr death window but was within 7yr of the PET. The CLT reduces the NRB available against the PET. So the CLT can affect IHT on a PET even though it sits outside the 7yr death window — creating a shadow effect up to 14 years before death (7yr before PET + 7yr before death). Example: CLT £200k at 9yr before death; PET £500k at 3yr before death. NRB for PET = £325k − £200k = £125k. Failed PET IHT: (£500k − £125k) × 40% = £150k. If no prior CLT: IHT = (£500k − £325k) × 40% = £70k. The prior CLT cost an extra £80k.
Does the Gift with Reservation rule override the 7-year rule?
Yes — the Gift with Reservation (GWR) rules (s102-s102C Finance Act 1986) override the 7-year PET clock entirely. If a donor gives away an asset but retains any benefit in it — for example, giving a house to their children but continuing to live in it rent-free, or giving investments while receiving 'interest-free loans back' — the gift is treated as a GWR. A GWR is NOT a PET. The 7-year clock does NOT run. The asset remains in the donor's estate at death regardless of when the purported gift was made — even if the 'gift' was made 20 years ago. The asset is valued at its date-of-death market value (s102(3) FA 1986) — not the original gift value. To avoid GWR on a property gift: the donor must pay full market rent to the donee (and stop receiving rent-free benefit). The Pre-Owned Asset Tax (POAT — Finance Act 2004 Sch 15) may apply as an alternative income tax charge in some GWR-adjacent situations.
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