The Inheritance Tax 7-year Rule Explained

In the UK, most gifts made to individuals become fully exempt from inheritance tax if the person who made them survives for seven years. This is the inheritance tax 7 year rule. Understanding precisely how it works, when the clock actually starts, what taper relief saves in money terms, and who is on the hook if the donor dies early, is where most people become less clear.

What is the 7-year rule?

A gift from one individual to another that exceeds the available annual exemptions is treated as a Potentially Exempt Transfer, or PET. A PET becomes fully exempt from inheritance tax if the person who made it survives for seven years from the date of the gift. If they die within seven years, the gift may become chargeable. It is added back into the estate and assessed against the nil-rate band, currently £325,000. The rate of tax charged depends on how long the donor survived after making the gift, which is where taper relief comes in.

It is worth distinguishing PETs from Chargeable Lifetime Transfers, or CLTs. Gifts into discretionary trusts are CLTs, not PETs, and are subject to an immediate inheritance tax charge if they exceed the available nil-rate band at the time of the gift. The 7 year rule inheritance tax treatment described in this article applies to PETs; CLTs work differently and are covered only briefly below.

When does the 7-year clock start?

When determining the time for IHT calculations, the clock starts on the date the gift is actually made. Crucially that does not include the date of any covering letter, tax return, or supporting paperwork. In practice, that means:

• For cash gifts, the date funds leave the donor’s bank account.
• For property or assets transferred at an undervalue, the date of legal completion, not the date of valuation.
• For shares, the date of the stock transfer form.

The tax year itself does not matter for this purpose. A gift made close to a tax year-end still runs its own seven years from the specific date it was made, not from the following 6 April.

The clock does not run at all for gifts with reservation. If the donor continues to benefit from a gifted asset, for example giving a property to a child but continuing to live in it rent-free, the gift is treated as remaining in the estate regardless of how much time passes. The 7 year inheritance tax rule simply does not apply to these arrangements until the reservation ends.

What taper relief actually saves

Here is the point that trips people up most: taper relief does not apply to every gift made three or more years before death. It only applies to gifts where the total value of all gifts made in the seven years before death exceeds the nil-rate band of £325,000. If total gifts in that period stay below £325,000, they are simply covered by the nil-rate band, and the taper table never comes into play because the gifts were not chargeable in the first place.

Taper relief reduces the rate of tax on the excess above the nil-rate band. It does not reduce the rate of tax on the gift as a whole. As part of your inheritance tax planning, have you checked whether your own gifting, added together, would sit above or below that threshold?

Worked example: Frances gifted £500,000 to her daughter in May 2021. Frances died in June 2025, four years and one month after making the gift.

• Step 1: the £500,000 gift falls within the seven-year window, so it is a failed PET and is brought back into the estate.
• Step 2: the £325,000 nil-rate band is set against the gift first, leaving a chargeable amount of £175,000.
• Step 3: because Frances died between four and five years after making the gift, taper relief applies at 24%. Tax on £175,000 at 24% comes to £42,000.
• Step 4: because the gift has used up Frances’s entire nil-rate band, any further assets in her estate are taxed at the full 40% rate.

Inheritance tax is calculated on the value of the gift at the time it was made, so if the asset has since increased in value, that higher value does not increase the tax charge on the gift itself.

The 14-year rule

Where a donor has made both CLTs and PETs in the years before death, the CLTs can affect how much nil-rate band is left available for the PETs, even if the CLT itself was made more than seven years before death. If a CLT was made between seven and fourteen years before death, and a PET was made within seven years of death, the CLT can use up part of the nil-rate band that would otherwise have sheltered the PET. This extends the effective lookback period to fourteen years in some scenarios, which is a detail that catches even experienced advisers out.

Practical example: a donor makes a £200,000 gift into a discretionary trust in 2012 (a CLT) and a £300,000 cash gift to their child in 2020 (a PET), then dies in 2025. While the CLT was thirteen years before death, and so outside the seven-year window for that gift on its own, its use of the nil-rate band carries forward and therefore affects how much is available against the 2020 PET. The £200,000 CLT is thus treated as having already used £200,000 of the £325,000 nil-rate band, leaving only £125,000 to shelter the £300,000 PET, so £175,000 of the PET is exposed to inheritance tax.

This is a genuinely complex area of IHT planning and wealth management. Our brief example is mentioned to flag that the issue exists, not to provide exhaustive guidance. Anyone with a history of both CLTs and PETs should take specialist advice.

Who pays the IHT on a failed PET?

Normally, the estate pays any inheritance tax due on a failed PET, out of the assets the deceased left behind. However, if total gifts made in the seven years before death exceed the nil-rate band of £325,000, the recipients of gifts falling above that threshold become personally liable for the tax on their portion. This can mean the recipient of a gift made several years earlier, who may have already spent the money, receives an unexpected demand from HMRC. If the estate ends up paying tax that should have been the recipient’s liability, the recipient must reimburse the estate.

The order in which gifts were made matters too, since gifts are assessed chronologically, with earlier gifts set against the nil-rate band first. Do you know the order in which any gifts you have made would be assessed?

Gift inter vivos insurance

A gift inter vivos policy is a life assurance policy taken out to cover the tapering inheritance tax liability on a large gift over the seven-year period. The policy is designed to pay out exactly the tax that would be due if the donor died at any point during those seven years, mirroring the taper relief reduction so the sum assured steps down each year as the exposure falls.

It is typically taken out by the donor and written in trust for the recipient, so the payout reaches the right person and does not itself form part of the estate. This is not widely known, but can be genuinely useful, particularly where the donor is in reasonable but not perfect health and the gift is large enough that a failed PET would create a significant tax liability for the recipient. Cost depends on the donor’s age, health, and the size of the gift, and a financial planner or insurance adviser can help structure it correctly.

Keeping records, and why it matters

Whilst sometimes an added administrative task, keeping records is a key part of inheritance tax planning. That’s because executors must account for all gifts made in the seven years before death on the inheritance tax return. Without records, an executor cannot demonstrate that a gift qualifies as exempt, or confirm when the seven-year clock actually started. HMRC’s form IHT403 is specifically used to record gifts on death, so keeping a contemporaneous record means the executor can complete it accurately.

In terms of what you need to keep, the minimum information to record are:

• the date of the gift,
• the amount or a description of the asset
• its market value at the date of the gift,
• the recipient’s name and relationship
• and whether any consideration was received in return.

A simple spreadsheet or signed letter, held with your other estate planning documents, is generally sufficient.

In summary

The “what is the 7 year rule in inheritance tax” question has a simple headline answer: survive seven years from the date of a gift, and it leaves your estate free of inheritance tax. But the mechanics of taper relief, the nil-rate band threshold caveat, the fourteen-year interaction with CLTs, what other assets are exempt from IHT and who becomes liable if the donor dies early all carry real financial consequences that are worth understanding properly rather than assuming.

This article covers the general position for the 2026/27 tax year and is for general information only; it is not personal financial or tax advice, and everyone’s circumstances are different. If you have recently made, or are considering, a large gift, these are questions worth working through properly rather than leaving to chance. Get in touch with our team and we will be glad to help you think it through as part of your wider financial plan.

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