When someone gives you a gift and dies within seven years, you as the recipient are the person who pays inheritance tax on that gift, not the estate. HMRC looks first to whoever received the transfer under Section 199 of the Inheritance Tax Act 1984.1Legislation.gov.uk. Inheritance Tax Act 1984 – Section 199 Only if you fail to pay within 12 months of the end of the month the donor died can HMRC turn to the personal representatives and collect from the estate instead, which then reduces what the other beneficiaries take under the will.
Why a Gift Can Still Be Taxed After It’s Given
A lifetime gift to another individual is a potentially exempt transfer, or PET. No tax is due when the gift is made. It becomes fully exempt only if the donor survives seven years from the date of the gift.2Legislation.gov.uk. Inheritance Tax Act 1984 – Section 3A Die before then and the gift is reclassified as a chargeable transfer, and inheritance tax may fall due on it.
The clock starts the day the donor parts with the asset. Every gift runs its own seven-year timer, so a donor who made several gifts across different years leaves behind several overlapping countdowns. If the executors cannot establish exactly when a gift was made, HMRC may treat it as having been made shortly before death.
What the Recipient Owes
Section 199 makes the person whose estate was increased by the gift liable for the tax.1Legislation.gov.uk. Inheritance Tax Act 1984 – Section 199 That is you, the recipient. Tax applies at 40% to any portion of the gift that sits above the £325,000 nil-rate band once earlier gifts have been accounted for.3GOV.UK. How Inheritance Tax Works – Thresholds, Rules and Allowances
A worked example: if you received £400,000 three years before the donor died and the full nil-rate band is available to shelter the gift, the taxable slice is £75,000 and the bill is £30,000. Payment is due by the end of the sixth month after the month of death. A February death gives a 31 August deadline, after which HMRC charges interest on the unpaid balance.4GOV.UK. Pay Your Inheritance Tax Bill – Overview
Two points catch recipients out. First, spending the money is not a defence. If the gift is gone by the time the donor dies, you still owe the tax personally. Second, the nil-rate band is applied to gifts in chronological order. Earlier recipients get the shelter first; a later recipient can face a bigger bill on a smaller gift simply because the threshold was already used up by someone else.
When the Estate Ends Up Paying Instead
If the recipient does not pay within 12 months of the end of the month the donor died, Section 199(2) lets HMRC collect from the donor’s personal representatives.1Legislation.gov.uk. Inheritance Tax Act 1984 – Section 199 The executors then have to use estate assets to cover the shortfall, which comes straight out of what the residuary beneficiaries would otherwise have received.
This route is typically triggered when the recipient is untraceable, has become bankrupt, or refuses to pay. Some donors anticipate this and write a clause into their will directing the estate to bear any inheritance tax arising on lifetime gifts. Where the estate pays, the gift is “grossed up”: the calculation is adjusted because the tax payment is itself treated as a further transfer of value, and the overall tax can rise as a result.
Executors carry personal risk here. If personal representatives distribute the estate without holding back enough to cover a potential gift-tax claim, they can be personally liable for the shortfall. Where the deceased made significant gifts in the seven years before death, executors should obtain clearance from HMRC before paying out.
How Taper Relief Changes What You Pay
Taper relief cuts the rate of tax on a failed PET when the donor survived at least three years after making the gift. It only applies where the total of gifts in the seven years before death exceeds the £325,000 nil-rate band. If the gift falls within the band, there is no tax for taper to reduce.5GOV.UK. How Inheritance Tax Works – Rules on Giving Gifts
- Less than 3 years between gift and death: 40%
- 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%
Those figures represent reductions of 20%, 40%, 60%, and 80% off the standard 40% charge.6HM Revenue & Customs. IHTM14611 – Lifetime Transfers – Taper Relief – When the Relief Applies Taper does not reduce the value of the gift itself. It only reduces the rate applied to the portion above the nil-rate band, which is why smaller gifts often see no benefit from it at all.
Gifts That Don’t Create a Bill for You
Some transfers are immediately exempt and never become chargeable, no matter when the donor dies. If your gift falls into one of these categories, there is no seven-year risk and no recipient liability to worry about.
The donor can give away up to £3,000 per tax year under the annual exemption, with one year’s unused allowance carried forward for a single further year.7Legislation.gov.uk. Inheritance Tax Act 1984 – Section 19 Small gifts of up to £250 to any number of different individuals are also exempt, provided no other exemption has been used for the same person.8GOV.UK. Work Out Inheritance Tax Due on Gifts Transfers between spouses and civil partners who are both UK-domiciled are exempt without limit.9Legislation.gov.uk. Inheritance Tax Act 1984 – Section 18 Wedding and civil partnership gifts have their own allowances: £5,000 from a parent, £2,500 from a grandparent, and £1,000 from anyone else, made on or before the day of the ceremony. Regular gifts out of surplus income that leave the donor’s standard of living intact can be fully exempt under Section 21 of the Inheritance Tax Act 1984, with no cap on the amount, provided the pattern is documented.10Legislation.gov.uk. Inheritance Tax Act 1984 – Section 21
The Trap: Gifts Where the Donor Kept a Benefit
One boundary is worth flagging because it undoes the seven-year rule entirely. If the donor gave something away but continued to benefit from it, the gift never leaves their estate for inheritance tax purposes. A parent who transfers the family home to a child and carries on living there rent-free is the classic case. Under Section 102 of the Finance Act 1986, the property is treated as still belonging to the donor at death and its full value is added back into the estate.11Legislation.gov.uk. Finance Act 1986 – Section 102 The recipient does not get the seven-year countdown at all. In these situations, tax comes out of the estate, and the executors deal with it as an estate liability rather than pursuing the recipient under Section 199.
How the Nil-Rate Band Decides Who Actually Pays
The £325,000 nil-rate band has been frozen since 2009 and is set to remain frozen until at least April 2031.12GOV.UK. Inheritance Tax Thresholds It is applied to chargeable lifetime gifts first, in the order they were made, and only the remainder shields the estate.
That ordering is what determines whether recipients or the estate end up bearing the tax. If the donor gave away £200,000 in chargeable gifts within seven years of death, only £125,000 of nil-rate band is left for the estate itself. Earlier recipients may pay nothing because the band absorbed their gifts; later recipients may face a full 40% charge (subject to taper) on everything above the exhausted band; and the estate can find itself with a larger bill than expected on assets that would otherwise have been sheltered. Anyone acting as executor or receiving a substantial lifetime gift needs to work through this chronology before assuming who owes what.