The 7-year gift rule and inheritance tax: how potentially exempt transfers work

One of the most powerful, and most underused, tools in inheritance tax planning is the gift. Under UK law, assets given away during your lifetime can be removed from your taxable estate entirely, provided you survive for seven years after making the gift. Every year that passes without acting is a year of potential tax saving lost.

Potentially Exempt Transfers (PETs)

A gift made to an individual (not a trust or company) is called a Potentially Exempt Transfer or PET. It is "potentially" exempt because whether it is subject to IHT depends on whether the donor survives seven years from the date of the gift. [1]

• Survive 7 years: the gift falls outside your estate entirely, no IHT
• Die within 7 years: the gift is added back into your estate and taxed, but taper relief reduces the effective rate

PETs apply to gifts of any value. There is no upper limit. You can give away £500,000 in a single year as a PET, if you survive seven years, it is fully exempt.

Taper relief: the sliding scale

If you die within seven years of making a PET, taper relief reduces the IHT charge on that gift. [1]

Years survived after gift	IHT rate applicable
Less than 3 years	40%
3 to 4 years	32%
4 to 5 years	24%
5 to 6 years	16%
6 to 7 years	8%

Important: Taper relief reduces the rate on the gift, but only applies once the nil-rate band is exhausted. Gifts are assessed against the nil-rate band in the order they were made, older gifts first. A gift made in year 6 may be fully covered by the nil-rate band and face no IHT charge regardless.

Annual exemptions: IHT-free gifts regardless of survival

The following gifts are exempt from IHT immediately, no seven-year survival period required. [2]

Annual exemption: £3,000 per person per tax year You can give away £3,000 each tax year free of IHT. If you did not use the previous year's allowance, you can carry it forward once, giving a maximum of £6,000 in a single year. This allowance applies per donor, so a couple can give £6,000 per year (or £12,000 carrying forward).

Small gifts: £250 per recipient per tax year You can give £250 to as many individuals as you like each tax year, with no IHT consequence. This cannot be combined with the annual exemption for the same recipient.

Wedding and civil partnership gifts

• From a parent: up to £5,000
• From a grandparent: up to £2,500
• From anyone else: up to £1,000

These are exempt if given before or at the time of the wedding.

Normal expenditure out of income This is the most powerful and most overlooked exemption. Regular gifts that:

• Are made out of income (not capital)
• Are part of a regular pattern
• Do not reduce your standard of living

…are immediately exempt from IHT with no annual limit. A person receiving a pension they do not need who regularly transfers surplus income to family members can shelter substantial sums through this route.

Gifts into trust: a different treatment

Gifts into a discretionary trust are not PETs. They are Chargeable Lifetime Transfers (CLTs) and may attract an immediate 20% IHT charge if they exceed the nil-rate band (£325,000). The seven-year survival rule still applies, but the starting point is different. [3]

This distinction matters: many people assume all gifts work the same way. A gift directly to your child is a PET; the same amount settled into a discretionary trust is a CLT.

The "gift with reservation" trap

A gift only works for IHT purposes if you genuinely give it away. If you continue to benefit from the gifted asset, for example, by giving your house to a child but continuing to live in it rent-free, HMRC treats this as a gift with reservation. The asset remains in your estate regardless of how long ago you made the gift. [1]

The solution, where people want to gift property but continue to live there, is to pay a market rent to the new owner. This creates taxable rental income for the recipient but removes the reservation.

Why starting early matters

The seven-year clock only runs from the date the gift is made. A decision deferred by five years means five fewer years of potential IHT reduction. For families with significant assets, beginning a structured gifting programme early, supported by professional advice on which assets to give and in what order, can materially reduce the eventual IHT bill.

Frequently asked questions

Does the £3,000 annual exemption reset each April? Yes. The annual exemption runs with the tax year (6 April to 5 April). Unused exemption can be carried forward one year only, it cannot accumulate over multiple years.

What evidence do I need that a gift was made? HMRC may ask executors to account for gifts made in the seven years before death. Keep a record of significant gifts, the date, amount, and recipient, and retain any relevant bank statements or transfer records.

Can I gift shares or property as well as cash? Yes. PETs can take the form of any asset: cash, investments, property. The value of the gift for IHT purposes is the market value at the date of transfer. Capital gains tax may also arise on the transfer, gifting appreciated assets may trigger CGT as well as affecting IHT.

What is the "normal expenditure out of income" exemption in practice? HMRC's guidance requires that the payments form part of a regular pattern, come from income, and leave the donor with sufficient income to maintain their normal standard of living. Payments that meet these tests can be documented with a letter of intent and bank transfer records. This exemption is regularly scrutinised, so good record-keeping is essential. [2]

This article provides general information only and does not constitute personal financial or tax advice. Tardi Group recommends seeking professional advice on your specific circumstances.