Inheritance tax gifts and the 7 year rule

How the 7 year rule works

1. Make a gift. Larger gifts are potentially exempt transfers.
2. Survive 7 years. If you live for 7 years after the gift, it falls out of your estate entirely.
3. Die within 7 years. The gift is added back to your estate and may be taxed, using the nil rate band first.
4. Taper relief. If death is between 3 and 7 years after the gift, the tax on it reduces on a sliding scale.

Gifts that are always exempt

• £3,000 a year. The annual exemption, which can be carried forward one year if unused.
• Small gifts of up to £250 per person per year.
• Normal gifts out of income that do not affect your standard of living.
• Wedding gifts within set limits, and gifts to a spouse or charity.

What the 7 year rule actually does

Give something away and survive 7 years, and it falls out of your estate entirely. Die within 7 years and the gift is added back when the Inheritance Tax is worked out.

The bit almost everyone gets wrong is what happens in between. Gifts made within 7 years are set against your nil rate band first, in date order, oldest first. The nil rate band is £325,000 and is frozen at that level until 5 April 2031.

So if your gifts in the 7 years before death come to less than £325,000, they use up nil rate band but no tax is charged on the gifts themselves. The cost falls on the estate, which has less nil rate band left.

Taper relief, and why it disappoints people

Taper relief only applies where cumulative gifts exceed the nil rate band, and it reduces the tax on the gift, not the value of the gift.

People routinely assume a £200,000 gift made 5 years before death is only 16% taxable. It is not. If total gifts stayed under £325,000 there was no tax on the gift to taper in the first place.

The exemptions that work every year

These sit outside the 7 year rule completely. Use them and the gift is immediately out of your estate.

• Annual exemption, £3,000 a tax year. Unused amount can be carried forward one year only, so a couple who have used neither could move £24,000 in a single year between them.
• Small gifts, £250 per recipient per tax year, to as many people as you like. You cannot combine it with another exemption for the same person.
• Wedding gifts: £5,000 to a child, £2,500 to a grandchild or great grandchild, £1,000 to anyone else. Must be given before the ceremony.
• Gifts to a spouse or civil partner, and to charities, with no limit.

The exemption nobody uses, and should

Normal expenditure out of income is unlimited and immediate. There is no cap and no 7 year wait. Three conditions: the gifts must form part of your normal pattern, be made out of surplus income rather than capital, and leave you able to maintain your usual standard of living.

For someone with a pension comfortably exceeding their spending, this is the most powerful tool available and it is barely used, because it requires records. Keep a simple annual schedule of income, expenditure and gifts. Without it, executors have to reconstruct the case years later, and often cannot.

Gifts with reservation, which undo the whole thing

Give away your house and carry on living in it rent free and it is treated as still yours. The 7 year clock never starts. The same principle catches giving away a holiday home you keep using, or shares whose dividends you keep receiving.

If you genuinely want to give something away, you have to give it away.

Two changes worth knowing about

Business and agricultural property relief changed on 6 April 2026. There is now a combined allowance of £2.5 million for property qualifying for 100% relief, and above that the relief drops to 50%. The allowance is transferable between spouses, so a couple can pass roughly £5 million of qualifying business or farming assets at full relief. Shares not listed on a recognised exchange, including AIM, moved from 100% to 50% relief.

Pensions come into the Inheritance Tax net for deaths on or after 6 April 2027. Unused pension funds and death benefits will form part of the estate. Death in service benefits from registered schemes and dependants' pensions from defined benefit arrangements are excluded, and the spouse and charity exemptions continue.

That second one is the bigger planning change for most families, and there is a window before it starts.

What to actually do

Use the annual exemptions every year, because they do not accumulate beyond one year. Record any regular gifting out of income properly from the outset. And if you are relying on business or agricultural property relief, or on a pension passing free of Inheritance Tax, both of those foundations have moved and are worth revisiting.

Frequently asked questions