Pensions & retirement
Gifting money to family: the 7 year rule inheritance tax explained
5 mins read
by
Regulated Advice Team
Last updated 9 September, 2026
The 7 year rule inheritance tax explained: this article covers what happens when you give away money or assets during your lifetime, and what it takes for that gift to become fully tax free.
As we all know, the taxman never forgets, except when it comes to gifting, which he thankfully forgets about after seven years, no matter how much you've gifted. It sounds like a complicated area of tax, but the rule itself is simple.
However, misunderstanding it can prove very costly. There is no upper limit on how much can be gifted tax free. Give away £7 million and survive 7 years and a day, and the entire amount falls outside your estate with nothing owed on it at all, yet die just one day earlier, at 6 years and 364 days, and millions would be owed in tax.
Summary: Gifting money to family: the 7 year rule inheritance tax explained
- This guide explains the 7-year inheritance tax and how gifts can affect your estate and inheritance tax liability. It also covers taper relief, real-life gifting examples, and why professional advice can help avoid costly mistakes.
What is the 7 year inheritance tax rule?
When you give money or assets away during your lifetime, it's known as a potentially exempt transfer, or PET. The 7 year rule inheritance tax treatment means it sits outside your estate for tax purposes, but only once 7 years have passed.
Until then, the gift takes up your nil rate band, currently £325,000. This is an important part of the 7 year inheritance tax rule. Tax is only due if the gift exceeds whatever's left of that band at the time.
However, survive the full 7 years and the gift becomes fully exempt, no matter how large it was.
Gifting versus not gifting: a £700,000 example
To see how this plays out, take someone with a £700,000 estate deciding whether to gift some of it away now.
|
Action |
Gift amount |
Estate left at death | Allowance left for estate | Taxable amount | Tax due (40%) |
| No gift | £0 |
£700,000 |
£325,000 | £150,000 | £150,000 |
| Gift £100,000 | £100,000 | £600,000 | £225,000 | £150,000 | £150,000 |
| Gift £325,000 | £325,000 | £375,000 | £0 | £150,000 | £150,000 |
If death comes within 7 years
While the gift stays within the £325,000 band, the total tax bill stays fixed at £150,000 regardless of how it is split. However, once the gift goes beyond that band, the picture changes. Taper relief then becomes relevant.
| Action | Gift amount | Estate left at death | Allowance left for estate | Taxable amount | Tax due (40%) |
| No gift | £0 | £700,000 | £325,000 | £375,000 | £150,000 |
| Gift £100,000 | £100,000 | £600,000 | £325,000 | £275,000 | £110,000 |
| Gift £325,000 | £325,000 | £375,000 | £325,000 | £50,000 | £20,000 |
| Gift £400,000 | £400,000 |
£300,000 |
£325,000 | £0 | £0 |
If death comes after 7 years
Once 7 years pass, the nil rate band resets fully for the estate. As a result, a £400,000 gift wipes out the tax bill entirely
Case study 1
A client aged 60, married with two grown up children, recently inherited a property worth £200,000. She already owns two further properties worth £400,000 each, plus £200,000 in savings.
Given her age and the size of her estate, an advisor would likely encourage her to gift in one go rather than stagger the payments. This approach can also simplify the 7 year planning period. Each gift starts its own 7 year clock from the date it is made. This is an important point when planning inheritance tax gifts. By contrast, drip feeding £10,000 now, another £10,000 in six months and £70,000 a year later creates multiple clocks. Some would finish years after the first. A single larger gift starts the clock ticking sooner on the whole amount, getting the full sum through the 7 years and clear of tax as early as possible.
Case study 2
Shortly before his death, 50% of the house and cash value was placed into a discretionary trust for their two daughters, to protect against care home fees. He also made small gifts totalling around £10,000 over the last 5 years, and died within 7 years of making them. His widow wanted to know how this affected her personal nil rate band once the trust was set up.
Once the trust is accounted for, her personal estate is worth around £475,000. Therefore, the remaining nil rate band is important when calculating her potential inheritance tax liability. Because he died within 7 years of making the £10,000 in gifts, they count as failed potentially exempt transfers (PETs), using up £10,000 of his nil rate band. That leaves £315,000 unused to transfer to her, giving a combined nil rate band of £640,000. That still comfortably covers her £475,000 estate. The residence nil rate band is more limited here. It only applies to a home passing directly to children, so it covers her share of the house but not the 50% already held in trust. The trust itself follows different rules from personal gifts. HMRC assessed tax when the trust was set up. If she dies within 7 years, HMRC can reassess the trust at death rates rather than letting the tax simply fall away. Based on the figures above, no inheritance tax is due either way. However, the trust's own tax position should be checked separately.
Taper relief under the 7 year inheritance tax rule
Taper relief only applies to the portion of a gift that exceeds the nil rate band, and only if death occurs within 7 years. Take a £400,000 gift. The first £325,000 is covered by the nil rate band.
The remaining £75,000 is taxable. However, the rate falls the longer the donor survives. The rest of the £300,000 estate has no allowance left and is taxed at 40%, a fixed £120,000 regardless of timing.
| Time before death | Gift amount | Rate on £75,000 excess | Tax on excess | Tax on £300,000 estate | Total tax due |
| Within 3 years | £400,000 | 40% | £30,000 | £120,000 |
£150,000 |
| 3-4 years | £400,000 | 32% | £24,000 |
£120,000 |
£144,000 |
| 4-5 years |
£400,000 |
24% | £18,000 |
£120,000 |
£138,000 |
| 5-6 years |
£400,000 |
16% | £12,000 | £120,000 | £132,000 |
| 6-7 years | £400,000 | 8% |
£6,000 |
£120,000 |
£126,000 |
| After 7 years | £400,000 | 0% |
£0 |
£0 | £0 |
The £120,000 owed on the estate itself never changes. In contrast, the 7 year gift rule gradually reduces the tax on the taxable gift.What falls is the tax on the gift, gradually, until the 7 year mark clears it completely.
Getting advice on the 7 year inheritance tax rule
The 7 year rule inheritance tax rules look simple on paper, but the numbers change quickly once a gift crosses the nil rate band. Speaking to a financial advisor before making significant gifts can avoid costly surprises for the people left behind.
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