UK IHT Potentially Exempt Transfers: Seven-Year Rule and Taper Relief

A gift you make to another person during your lifetime falls out of your estate for UK inheritance tax if you live for seven years after making it. That is the essence of potentially exempt transfers and the seven-year rule: the gift is ignored by HMRC when you make it, and only becomes taxable if you die inside the seven-year window. With the nil rate band frozen at £325,000 through at least 2028, using lifetime gifts well has become a larger part of keeping an estate below the tax threshold.¹

What Qualifies as a Potentially Exempt Transfer

A potentially exempt transfer, or PET, is an outright lifetime gift from one individual to another. Under section 3A of the Inheritance Tax Act 1984, the category also covers gifts into a trust for a disabled person, and gifts into a bereaved minor’s trust in the narrow situation where an existing immediate post-death interest ends and the property passes into the trust.²

Most gifts into discretionary or other standard trusts do not qualify as PETs. They are chargeable lifetime transfers, taxed immediately at 20% on any value above the nil rate band.³

For a transfer to count as a genuine PET, you must give the asset away completely and receive no ongoing benefit from it. Give your house to your children and keep living there rent-free, and it is not a PET at all. HMRC treats it as a gift with reservation of benefit, and the property stays inside your estate as if you had never given it away.⁴

The reservation of benefit rules catch more than a gifted home you continue to occupy. Giving shares in your company while arranging to be appointed to a paid board role, or retaining an option to buy back what you have given, both count as keeping a benefit. HMRC looks at the substance of the arrangement, and even an informal understanding that you will keep benefiting can spoil the gift.⁴

When the Seven-Year Clock Starts and Stops

The clock begins on the date the recipient takes full, unconditional possession of the asset. There are no extensions and no exceptions. Your health at the time of the gift is irrelevant. Once the seventh anniversary passes, the gift is permanently outside your estate.⁵

Until that anniversary, the status of the gift is unresolved. Survive the seven years and it becomes fully exempt. Die inside them and it is pulled back into the estate calculation. That is why lifetime giving is more powerful the earlier it begins: a gift made at 65 is safe by 72; the same gift made at 80 is a bet on longevity.

What Happens if You Die Within Seven Years

If you die inside the seven-year window, each PET made in that period becomes a chargeable transfer and has to be looked at in order. Two things then decide how much tax is due: whether the nil rate band still has room to shelter the gift, and how many years passed between the gift and death.

Gifts use up the nil rate band in chronological order, starting with the earliest. This is where estates often get caught. If your lifetime gifts in the seven years before death add up to more than £325,000, the later gifts have no nil rate band left to shelter them, and the excess is exposed to inheritance tax.⁵

Take someone who gave £325,000 to a sibling four years before death and £100,000 to a friend three years before death. The first gift absorbs the whole nil rate band. The second gift has no shelter left and is taxed at the full 40% rate, because it fell inside the three-year window where no taper relief applies.

Taper Relief on the Rate of Tax

Where a gift does exceed the nil rate band, taper relief reduces the rate charged on the excess according to how many years passed before death:⁶

0 to 3 years before death: 40% (no taper relief)
3 to 4 years: 32%
4 to 5 years: 24%
5 to 6 years: 16%
6 to 7 years: 8%
7 years or more: 0%

Two points here trip people up. First, taper relief reduces the rate of tax, not the value of the gift. Second, the reduced rates only bite where the gift exceeds the nil rate band. If your total chargeable gifts in the seven years before death sit within £325,000, no tax is due on them and taper relief does not come into it.¹

Tax is calculated on the market value of the gift at the date it was made, not its value at the date of death. If you gave away shares worth £400,000 and they later doubled, the tax is still worked out on £400,000.

The recipient of a gift is primarily liable for any inheritance tax charged on it, separately from tax owed on the rest of the estate. One year after death, the executors become jointly liable for any unpaid tax on lifetime gifts.⁷

Gifts That Do Not Need to Survive Seven Years

Not every lifetime gift is a PET. Several categories are immediately and permanently exempt from inheritance tax the moment they are made, whatever happens next. Use these first, because amounts within an exemption never enter the seven-year calculation at all.

Annual and Small Gift Exemptions

You can give away up to £3,000 per tax year (6 April to 5 April) free of inheritance tax. Any unused portion carries forward one year only. Separately, you can make any number of small gifts of up to £250 per recipient per year, provided you have not used another exemption on the same person.⁵

Wedding and Civil Partnership Gifts

Gifts connected with a marriage or civil partnership have their own exemption, tiered by relationship:

Parent of the bride or groom: up to £5,000
Grandparent or great-grandparent: up to £2,500
Anyone else: up to £1,000

This can be combined with the annual exemption for the same person, so a parent could give a child up to £8,000 tax-free around the wedding.⁵

Transfers Between Spouses and Civil Partners

Transfers between spouses or civil partners are exempt under section 18 of the Inheritance Tax Act 1984, with no monetary limit, both during life and on death. No seven-year clock starts. A cap applies where the receiving spouse is domiciled outside the UK.⁸

Normal Expenditure Out of Income

Regular gifts made out of surplus income are immediately exempt under section 21 of the Inheritance Tax Act 1984 if three conditions are met: the gift forms part of your normal pattern of spending, it comes from income rather than capital (taking one year with another), and after making it you still have enough income to maintain your usual standard of living.⁹

There is no cap on the amount. A grandparent paying school fees from pension income or a parent making monthly payments into a child’s savings account can both qualify. But you have to be able to show a pattern, and HMRC will look at the frequency, amounts, and recipients. Without contemporaneous records of income received, gifts made, and living expenses, the exemption is very hard to prove after the fact.

Capital Gains Tax on the Same Gift

Inheritance tax is not the only tax involved. If you give away something other than cash, such as property, shares, or a business interest, the transfer is treated as a disposal at market value for capital gains tax. You are taxed as if you had sold the asset for its market value on the date of the gift, even though you received nothing. Transfers between spouses or civil partners are the exception: those happen at a value that produces neither gain nor loss.¹⁰

This creates a real tension. Holding an asset until death avoids capital gains tax entirely, because the recipient inherits at market value with no gain to tax, but the asset stays inside your estate for inheritance tax. Giving it away starts the seven-year clock but triggers a capital gains bill now. For high-value assets with large unrealised gains, the numbers need to be worked both ways before choosing.

Records and Reporting After Death

Every lifetime gift should be documented when it is made, not reconstructed from memory later. A gift log should record the date, the market value of the asset on that date, a description of what was given, and the recipient’s full name and address. For non-cash gifts, a professional valuation at the time of transfer is the strongest evidence of value. Bank statements, share transfer forms, and conveyancing documents show that the transfer actually happened on the date claimed. Without that, executors cannot prove when the seven-year clock started.

If you are relying on the normal expenditure out of income exemption, keep evidence of your total income, your regular living expenses, and the pattern of gifts, because HMRC will want to see that the gifts were habitual and affordable without dipping into capital.

After a donor dies, personal representatives must report all lifetime gifts made in the previous seven years to HMRC on Form IHT403, filed alongside the main IHT400 inheritance tax account.¹¹ Omitting gifts is far more serious than filing late. If HMRC decides an error on the IHT400 or IHT403 was deliberate, the penalty runs from 20% to 70% of the additional tax owed. If it was deliberately concealed, the range is 30% to 100%.¹²

Executors who are unsure whether the deceased made gifts should check bank statements, property records, and correspondence, and ask family members directly. Cash gifts and informal transfers often come to light only that way, and the cost of missing one is almost always higher than the effort of looking.

1
GOV.UK. Inheritance Tax Nil-Rate Band and Residence Nil-Rate Band Thresholds From 6 April 2026
2
Legislation.gov.uk. Inheritance Tax Act 1984 – Section 3A
3
GOV.UK. Trusts and Inheritance Tax
4
GOV.UK. Inheritance Tax Manual – IHTM14334
5
GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances
6
GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances – Section: The 7 Year Rule
7
GOV.UK. IHT403 – Gifts and Other Transfers of Value
8
GOV.UK. Inheritance Tax Manual – IHTM11032 – Spouse or Civil Partner Exemption
9
Legislation.gov.uk. Inheritance Tax Act 1984 – Section 21
10
GOV.UK. Capital Gains Tax: Gifts to Your Spouse or Charity
11
GOV.UK. Inheritance Tax: Gifts and Other Transfers of Value (IHT403)
12
GOV.UK. Penalties: An Overview for Agents and Advisers