The 7 year rule for inheritance tax: how gifts before death are treated

The 7 year rule means gifts made more than seven years before someone's death are usually free of inheritance tax. Gifts made within seven years can be pulled back into the estate if the giver dies within that window. The clock starts on the date of the gift, not the date of death.

The mechanics matter because taper relief, the £325,000 nil rate band, and the order in which gifts are counted all interact in ways that are easy to misread.

This guide explains how the 7 year rule actually works in practice, where the common mistakes are, and what changed in the 2025 Autumn Budget.

How the 7 year rule works

Most lifetime gifts to individuals are called potentially exempt transfers (PETs). They become fully exempt from inheritance tax once the giver has survived seven years from the date of the gift.

If the giver dies within seven years, the gift is added back into the estate for inheritance tax purposes. Whether tax is actually charged depends on whether cumulative gifts in that period exceed the £325,000 nil rate band.

Gifts into most trusts are treated differently. They are chargeable lifetime transfers (CLTs) and may be taxed at 20% immediately if they exceed the nil rate band. This guide focuses on PETs, which is what most family gifts are.

Taper relief, in plain terms

Taper relief reduces the rate of inheritance tax on a gift if the giver survives at least three years after making it.

Years between gift and deathTax rate on the gift0 to 3 years40%3 to 4 years32%4 to 5 years24%5 to 6 years16%6 to 7 years8%7 years or more0%

There are two things people commonly get wrong about taper relief.

First, taper relief reduces the tax rate. It does not reduce the value of the gift. The full gift still counts against the nil rate band.

Second, taper relief only matters if cumulative gifts in the seven years before death exceed the nil rate band. Gifts use up the nil rate band first. The taper-relieved rate only applies to the part above £325,000.

A worked example

David gives his daughter £400,000 in July 2020. He dies in September 2025, just over five years later. He made no other gifts in the preceding seven years.

The first £325,000 of the gift uses up his entire nil rate band. The remaining £75,000 is taxable.

Because the gift was made between 5 and 6 years before death, taper relief applies at 16% rather than the full 40%. The inheritance tax on the gift is £75,000 × 16% = £12,000.

Without taper relief, it would have been £75,000 × 40% = £30,000. The taper saved his daughter £18,000.

There's a knock-on effect. David's death estate now has no nil rate band remaining. It was used up by the lifetime gift. Anything in his estate above the residence nil rate band (if it applies) will be taxed at 40% from the first pound.

This is why large lifetime gifts can backfire if the giver dies before the gifts fully fall out of the 7 year window.

Gifts that are always exempt

Several types of gift are exempt from inheritance tax regardless of the 7 year rule:

• The annual exemption: £3,000 per tax year. Unused allowance can be carried forward by one year, and one year only.

• Small gifts: up to £250 per person per tax year, provided no other exemption has been used for that person.

• Wedding or civil partnership gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else.

• Gifts out of regular income: must come from normal expenditure and not reduce the giver's standard of living.

• Gifts to a UK-resident spouse or civil partner.

• Gifts to UK-registered charities, political parties, and qualifying national bodies.

These exemptions are powerful when used consistently. A couple using their annual exemptions in full can give £6,000 a year out of their estate, or £60,000 over ten years, with no 7 year rule concerns at all.

Gifts with reservation

If someone gives an asset away but continues to benefit from it, HMRC treats it as still part of the estate. This is called a gift with reservation.

The classic example is giving your house to your child while continuing to live in it rent-free. The seven year clock does not start. The house counts as part of the estate at death.

There are exceptions. You can avoid the gift with reservation rules by paying full market rent for the use of the asset. The arrangement has to be genuinely commercial and properly documented.

Why recordkeeping matters

When someone dies, their executor has to declare any gifts made in the seven years before death on the inheritance tax return.

HMRC asks. They check bank statements, asset registers, and other records for evidence of unreported transfers. If the executor cannot evidence that a gift met one of the always-exempt categories, HMRC may treat it as a PET and tax it accordingly.

A simple gifts log, kept up to date, saves the executor a lot of work and protects beneficiaries from avoidable tax. Include the date of each gift, the recipient, the amount, and which exemption (if any) is being used.

What the 2025 Autumn Budget changed (and didn't)

The Chancellor announced several changes to inheritance tax in the November 2025 Budget. The 7 year rule was widely rumoured to be on the chopping block, but it survived.

What did change:

• The nil rate band remains frozen at £325,000 until April 2031, confirming an existing freeze.

• Agricultural Property Relief and Business Property Relief are capped at 100% on the first £1 million of qualifying assets from April 2026, with 50% relief on anything above.

• Unused defined contribution pension pots will be brought into the inheritance tax net from April 2027.

What did not change:

• The 7 year rule still applies as set out above

• Taper relief percentages are unchanged

• All the gift exemptions listed above still apply

The pension change is significant. Pensions have been a major route for passing wealth efficiently outside the estate. From April 2027 that route narrows. Anyone with substantial pension savings considering lifetime gifts should be aware of the time it takes for those gifts to fall outside the estate under the 7 year rule.

What this means for executors

If you're dealing with the estate of someone who died recently, you'll need to:

1. Ask close family whether the deceased made any significant gifts in the past seven years

2. Check bank statements for large transfers in that period

3. Identify which exemptions apply to each gift

4. Calculate any tax due on PETs that fall within the window

5. Include them on the inheritance tax return (IHT400 or IHT205, depending on how the estate is valued)

Estates with clean records are administered faster and at lower professional cost. Estates without them often require HMRC enquiries, family disputes, and additional time.