Under the potentially exempt transfer 7 year rule, a lifetime gift you make to another individual escapes Inheritance Tax entirely if you live for at least seven years after making it. Die within that window and the gift is pulled back into your estate for tax purposes, although taper relief may soften the bill once three years have passed. The rule is what makes lifetime gifting a practical way to reduce Inheritance Tax, and it is also what catches families out when a donor dies sooner than expected.
What Counts as a Potentially Exempt Transfer
Section 3A of the Inheritance Tax Act 1984 defines a PET as a transfer of value from one individual to another that would otherwise be a chargeable transfer.1Legislation.gov.uk. Inheritance Tax Act 1984, Section 3A The donor has to genuinely let go. No continued use of the asset, no income from it, no strings. Gifts into trusts for disabled people or bereaved minors can qualify, but gifts into most other trusts are immediately chargeable rather than potentially exempt.
If you give away a house but keep living in it rent-free, HMRC treats it as a gift with reservation of benefit and leaves it inside your estate as though the gift never happened.2GOV.UK. IHTM14301 – Lifetime Transfers: Gifts With Reservation The seven-year clock does not start on a gift you have not really given away.
Surviving Seven Years, or Not
The seven-year clock runs from the exact date of the gift. A transfer made on 15 March 2020 needs the donor to live until at least 15 March 2027 to fall completely outside their estate. Survive that date and there is no Inheritance Tax on the gift, no reporting to HMRC, no ongoing issue.3GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances
Die inside the seven years and the gift becomes a “failed PET.” Its full value at the date of the gift is added back into the estate for Inheritance Tax calculations. There is no near-miss exception. A gift made six years and eleven months before death is still a failed PET, though taper relief will reduce the rate.
How Failed Gifts Interact With the Nil-Rate Band
A failed PET does not automatically produce a tax bill. Inheritance Tax only bites where total chargeable transfers exceed the nil-rate band, which sits at £325,000 for 2025–26 and has been frozen at that figure since 2009. The freeze is currently extended through April 2028.4GOV.UK. Inheritance Tax Nil-Rate Band Thresholds From 6 April 2026
HMRC works through failed gifts in the order they were made, cumulating them against the nil-rate band. Say someone gave £200,000 in 2019 and another £200,000 in 2021, then died in 2025. The 2019 gift takes £200,000 of the nil-rate band. The 2021 gift finds only £125,000 left, so £75,000 falls into charge at 40%.5GOV.UK. IHTM14513 – The Charge to Tax: Potentially Exempt Transfers: Cumulation Earlier gifts eat the allowance first, and a large gift years ago can wipe it out for everything that follows, including the assets left in the estate at death.
The £175,000 residence nil-rate band is a separate allowance for a qualifying home passing to direct descendants on death. It cannot shelter a failed PET.
Taper Relief Between Years Three and Seven
Taper relief reduces the rate of tax charged on a failed PET when the donor dies between three and seven years after the gift. It is often misunderstood: taper cuts the tax rate, not the value of the gift, and it only matters if the gift actually pushes chargeable transfers above the nil-rate band. If everything stays within £325,000, there is no tax for taper to reduce.
The sliding scale is:3GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances
- 0 to 3 years before death: 40% (no reduction)
- 3 to 4 years: 32%
- 4 to 5 years: 24%
- 5 to 6 years: 16%
- 6 to 7 years: 8%
A worked example: a failed PET with £100,000 sitting above the nil-rate band, where the donor died five and a half years after the gift, is taxed at 16%. That is £16,000, against the £40,000 that would apply if death had occurred inside three years.
Who Actually Pays
The recipient of a failed PET is primarily liable for the Inheritance Tax on it. This surprises many families. Someone who received a gift years earlier can suddenly face a bill they had not planned for. If the recipient cannot pay, the liability falls back on the estate. Anyone making substantial lifetime gifts is well advised to warn recipients that the seven-year rule is not just the donor’s problem.
The tax on the rest of the estate is a separate calculation, handled by the executor. But because failed PETs use up the nil-rate band first, a large failed gift can increase the tax on the estate as well.
Exemptions That Sit Outside the Seven-Year Rule
Some gifts never enter the seven-year framework at all, because they are exempt from Inheritance Tax the moment they are made. Using these first reduces the value exposed to the survival clock.
- Annual exemption of £3,000 per tax year, with one year’s unused allowance carried forward, giving up to £6,000 in a single year.
- Small gifts of up to £250 per person per tax year, provided no other exemption has been used on that same person.
- Wedding or civil partnership gifts of up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else.
- Regular gifts made out of income, with no upper limit, as long as they come from surplus income and do not reduce your usual standard of living.
The wedding and normal-expenditure exemptions can be combined with the annual exemption for the same recipient; the small gifts allowance cannot.3GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances Gifts between spouses or civil partners, and gifts to charity, are fully exempt without limit. Everything above these exemptions is where the seven-year rule takes over.
Records the Executor Will Need
Good records make the difference between a straightforward estate and months of untangling. HMRC expects the executor to account for every gift made in the seven years before death. For each gift, the donor should note:
- The date it was made
- What was given and its value at that date
- The recipient’s full name and address
- Any exemption applied
Property and valuables should have a formal valuation at the date of gift. Bank statements are usually enough for cash transfers.3GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances
After death, these details go on Schedule IHT403, filed with the main IHT400 return. IHT403 covers gifts made on or after 18 March 1986 and asks for the date, value, recipient, and any exemptions for each.6GOV.UK. Inheritance Tax: Gifts and Other Transfers of Value (IHT403)
Deadlines That Follow the Rule
The IHT400 and its schedules must reach HMRC within 12 months of the date of death, and before probate is granted. The payment deadline is shorter. Inheritance Tax is due by the end of the sixth month after death, and interest runs from that point.7GOV.UK. How to Value an Estate for Inheritance Tax and Report Its Value Someone who died in January would need the tax paid by 31 July. Probate cannot proceed until HMRC has the return and the tax has been paid or arrangements have been made, so most executors file well before the 12 months are up.