The 7-Year Rule for Inheritance Tax UK: How Gifts Become IHT-Free After 7 Years (2026)
Under the 7-year rule, gifts to individuals are completely IHT-free if you survive 7 years from the date of the gift. If you die in years 3–7, taper relief reduces the IHT — from 32% in year 3 down to 8% in year 6. The clock starts on the date the gift is made. Every day of delay is a day lost — start gifting now.
| Years from Gift to Death | IHT Rate on Failed PET | Taper Reduction | IHT on £500k Gift (above £325k NRB = £175k taxable) |
|---|---|---|---|
| 0–3 years | 40% | None | £70,000 |
| 3–4 years | 32% | −20% | £56,000 |
| 4–5 years | 24% | −40% | £42,000 |
| 5–6 years | 16% | −60% | £28,000 |
| 6–7 years | 8% | −80% | £14,000 |
| 7+ years | 0% | −100% | £0 — fully exempt |
Example assumes a £500,000 PET; NRB £325,000 fully available; no prior CLTs. Taper applies only on the £175,000 above the NRB. IHT payable by the donee (recipient) or the estate.
The 7-Year Rule: Complete Guide
What is the 7-year rule for inheritance tax?
The 7-year rule refers to the treatment of Potentially Exempt Transfers (PETs — s3A IHTA 1984) for IHT purposes. A PET is a gift from an individual to another individual (or to certain types of trust) — it is 'potentially' exempt because it becomes fully exempt from IHT if the donor survives for 7 years from the date the gift was made. If the donor dies within 7 years, the PET 'fails' and the gift is brought back into the IHT calculation — subject to taper relief (which reduces the IHT charge) if death occurs in years 3–7. The 7-year rule applies to gifts to: individuals (children, grandchildren, friends, unmarried partners); absolutely bare trusts; accumulation and maintenance trusts (pre-Finance Act 2006). The 7-year rule does NOT apply to: gifts to discretionary trusts (CLTs — immediately chargeable at 20%); gifts where the donor retains a benefit (gift with reservation — s102 FA1986); gifts from trusts (trust distributions follow different rules). The key practical point: the 7-year clock starts on the date the gift is made. Every year of delay in making gifts is a year lost — a gift made in 2020 is fully exempt in 2027; the same gift made in 2023 is not fully exempt until 2030.
Taper relief: IHT on failed PETs in years 3 to 7
If a PET fails (the donor dies within 7 years), the gift is brought back into the IHT calculation. The rate of IHT on the failed PET depends on how long ago the gift was made: (1) Gift made 0–3 years before death: full 40% IHT rate applies (taper relief does not reduce the rate in the first 3 years); (2) Gift made 3–4 years before death: 32% IHT rate (80% of 40%); (3) Gift made 4–5 years before death: 24% IHT rate (60% of 40%); (4) Gift made 5–6 years before death: 16% IHT rate (40% of 40%); (5) Gift made 6–7 years before death: 8% IHT rate (20% of 40%); (6) Gift made 7+ years before death: 0% IHT — fully exempt. Important: taper relief reduces the rate of IHT on the amount of the failed PET that exceeds the available NRB. If the failed PET is below the NRB, there is no IHT regardless of the year — taper relief is only relevant where the gift (plus cumulative chargeable transfers in the 7 years before the gift) exceeds the NRB (£325,000). Example: a PET of £200,000 in year 5 before death. The NRB is £325,000. The failed PET (£200,000) is less than the NRB — no IHT, regardless of taper relief. Taper relief only benefits gifts above the NRB.
How failed PETs interact with the nil-rate band (cumulation)
When a PET fails and is brought back into the IHT calculation, it is charged against the NRB in the order of gifts made — gifts made earlier use the NRB first. This 'cumulation' rule is critical for planning: (1) If a person has made multiple gifts in the 7 years before death, each gift (in chronological order) uses up the NRB; (2) Once the NRB is exhausted by the gifts, the remaining failed PETs (and the estate) are subject to 40% IHT (subject to taper relief if 3+ years have elapsed); (3) The estate value on death is calculated separately — the estate pays IHT at 40% on the taxable estate value, after any NRB not used by failed PETs. Cumulation also applies to Chargeable Lifetime Transfers (CLTs — gifts to trusts): CLTs made in the 7 years before a failed PET use the NRB before the PET does. This means a large gift to a discretionary trust 3 years before a large PET may exhaust the NRB, leaving the PET fully taxable. Planning order: make PETs before CLTs where possible — PETs use the NRB only if they fail; CLTs use the NRB immediately.
What counts as a gift for the 7-year rule?
For the 7-year rule to apply, the gift must be a genuine transfer: (1) The donor must give up all control and benefit — if the donor continues to use or enjoy the gifted asset, the gift is a 'gift with reservation' (s102 FA1986) and remains in the estate on death regardless of when it was made. Example: gifting a house to a child but continuing to live in it rent-free is a gift with reservation — the 7-year rule does not apply, and the house stays in the estate; (2) The gift must be of something with value — gifts of cash, investments, property interests, or other assets all qualify; (3) The gift must be voluntary — sales at market value are not gifts; sales at undervalue create a gift element equal to the discount from market value; (4) Trusts: gifts to bare trusts are PETs; gifts to discretionary trusts are CLTs (not subject to the 7-year rule — different rules apply). What is NOT a gift for 7-year purposes: the annual exemption (£3,000/yr — immediately exempt, not a PET); small gifts exemption (up to £250 per recipient per year — immediately exempt); wedding/civil partnership gifts within the statutory limits (s19-22 IHTA 1984); normal expenditure from income (s21 — immediately exempt).
Recording gifts: the IHT403 form and the evidence requirement
When a person dies, their executors must declare all gifts made in the 7 years before death on form IHT403 (Gifts and other transfers of value). Executors are personally liable for the accuracy of the IHT return — if gifts are omitted and HMRC discovers them, the estate may face interest, penalties, and additional IHT. The practical requirement: (1) Keep a record of every gift made — date, amount, recipient, and whether any exemption applies; (2) Records should note whether the gift was from capital or income (relevant for the s21 normal expenditure exemption); (3) Bank statements, letters confirming gifts, and deed of gift documents all serve as evidence. Retrospective reconstruction: where the deceased kept no records, executors must piece together gifts from bank records, receipts, and beneficiary statements — this is time-consuming and may miss gifts, creating IHT risk. The solution: start a gift log now, updated annually. WillSafe recommends noting each gift in a personal record alongside the will — making the executor's job significantly easier.
The 7-year rule and whole-of-life insurance in trust
A whole-of-life insurance policy written in trust provides a practical solution for the IHT risk during the 7-year period after making a large PET. If the donor dies within 7 years of the gift, the failed PET may generate an IHT bill. A whole-of-life policy (or a 'Gift Inter Vivos' — GIV — decreasing term policy specifically designed for the 7-year taper period) can: (1) Pay out a sum on death to cover the potential IHT bill on failed PETs; (2) Be held in trust — outside the estate, payable to the executors or beneficiaries to fund the IHT; (3) Reduce in cover as the years pass (GIV policy) to mirror the taper relief reduction. GIV (Gift Inter Vivos) term policy: decreasing cover over 7 years, matching the reducing IHT exposure as taper relief increases. Premium paid from regular income may itself qualify as normal expenditure from income (s21 IHTA 1984 — immediately exempt).
Frequently Asked Questions
What is the 7-year rule for inheritance tax?
The 7-year rule refers to Potentially Exempt Transfers (PETs — s3A IHTA 1984). Any gift from an individual to another individual (or certain trusts) is IHT-free if the donor survives 7 years from the date of the gift. If death occurs within 7 years, the gift is brought back into the IHT calculation — with taper relief reducing the IHT charge if death occurs in years 3–7: 32% (yr 3–4), 24% (yr 4–5), 16% (yr 5–6), 8% (yr 6–7), 0% after 7 years.
When does the 7-year clock start for inheritance tax gifts?
The 7-year clock starts on the date the gift is made — not the date of death. If you give money to your child on 1 June 2026, the gift becomes fully IHT-exempt on 1 June 2033 (7 years later). Delay costs: a gift deferred by one year is not fully exempt for one additional year. Make gifts as early as possible to maximise the time running on the 7-year clock.
How does taper relief work on the 7-year IHT rule?
Taper relief reduces the IHT rate on failed PETs (gifts where the donor died within 7 years): years 0–3: 40% (no taper); years 3–4: 32%; years 4–5: 24%; years 5–6: 16%; years 6–7: 8%; year 7+: 0%. Important: taper relief only reduces the rate on the amount of the failed PET above the NRB (£325,000). If the gift is below the NRB, there is no IHT even without taper relief.
Can I give away my house under the 7-year rule to avoid IHT?
Only if you genuinely give up the property — move out and do not live there or benefit from it in any way. If you give the house to your children but continue to live in it rent-free (or at a below-market rent), it is a 'gift with reservation' (s102 FA1986) — the 7-year clock does not run and the house remains in your estate as if you never gave it away. To avoid this, you must either: (a) move out completely and receive no benefit; or (b) pay a full market rent to the new owner — rent payments are taxable income for the new owner.
Do I need to declare gifts made under the 7-year rule on my estate when I die?
Yes — your executors must declare all gifts made in the 7 years before death on form IHT403, submitted with the IHT400 estate return. Gifts that were fully exempt (annual exemption, normal expenditure from income, etc.) should be noted. Executors are personally liable for accuracy — omitting a failed PET can result in underpayment of IHT, HMRC penalties, and interest. Keep a gift log showing date, amount, recipient, and the exemption applied.
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