What is the 7-year rule for inheritance tax?
The 7-year rule is a key part of inheritance tax (IHT) planning. It applies when you give money or assets away during your lifetime and want to reduce the size of your estate for tax purposes.
In simple terms, if you make a gift and then live for seven years or more, that gift is usually free from inheritance tax. These gifts are called potentially exempt transfers (PETs).
But if you die within 7 years, the value of the gift may be added back into your estate and it could become liable for IHT.
This is why it’s crucial to plan carefully and seek personalised inheritance tax advice to avoid unexpected costs for your loved ones.
How taper relief works (and when it applies)
If you die within 7 years of making a PET, IHT could be due—but there is some relief available depending on how long you survive after the gift was made.
This is known as taper relief.
- 0–3 years after the gift: full 40% inheritance tax rate applies
- 3–7 years: tax is reduced on a sliding scale
Here’s how taper relief reduces the tax due:
| Years between gift and death | IHT rate on the gift |
|---|---|
| 0–3 years | 40% |
| 3–4 years | 32% |
| 4–5 years | 24% |
| 5–6 years | 16% |
| 6–7 years | 8% |
| 7+ years | 0% |
It’s important to understand that taper relief applies to the tax, not the value of the gift.
Also, taper relief only applies if the total value of gifts made in the 7 years before death exceeds the nil rate band (currently £325,000). If you stay under that threshold, no IHT is due.
Worked example: how the 7-year rule and taper relief reduce inheritance tax
Let’s say you gift £500,000 to your adult children in June 2020. This is a potentially exempt transfer because it was made to individuals.
The nil rate band is £325,000, so the gift exceeds this by £175,000.
If you were to pass away:
- In 2022 (within 2 years): full IHT of 40% applies on the £175,000 excess
→ Tax due: £70,000 - In 2024 (4 years after the gift): taper relief reduces the tax rate to 24%
→ Tax due: £42,000 - In 2027 or later (7+ years): the gift is outside your estate and fully exempt
→ Tax due: £0
Good record-keeping and early planning are key to making the most of these rules. Speak to an inheritance tax adviser to avoid pitfalls.
What types of gifts qualify for the 7-year rule?
The 7-year rule applies to lifetime gifts, but how the gift is treated depends on who or what you give it to:
Gifts that are PETs (Potentially Exempt Transfers)
- Outright gifts to individuals, such as children or grandchildren
- Gifts into bare trusts, where the beneficiary has an absolute right to the assets
These gifts are potentially exempt and fall out of your estate if you survive 7 years.
Gifts that are CLTs (Chargeable Lifetime Transfers)
- Gifts into discretionary trusts or most other types of trusts (excluding bare trusts)
- These gifts are immediately reportable to HMRC if they exceed the £325,000 nil rate band
- They may incur an immediate inheritance tax charge of 20%
- If you die within 7 years, additional tax may be due, and taper relief may apply
If you’re considering setting up a trust, it’s essential to get tailored inheritance tax advice. These rules can get complex quickly.
Other gifting allowances to consider
Before relying on the 7-year rule, make sure you’re making use of the tax-free allowances available each year. These gifts are immediately exempt and do not trigger the 7-year rule at all.
Annual gifting exemptions:
- £3,000 per tax year: You can give this amount tax-free each year (any unused allowance can carry over one year)
- £250 per person: Small gifts to different individuals, so long as they haven’t received the £3,000 allowance from you
- Wedding gifts: Up to £5,000 for a child, £2,500 for a grandchild, and £1,000 for others
- Regular gifts from income: Tax-free if they’re part of your normal spending and don’t reduce your standard of living
These exemptions are powerful tools and often underused. A good inheritance tax adviser will help you build these into your estate plan effectively.
Common mistakes to avoid
- Failing to document gifts properly: dates, amounts, and recipients should be recorded
- Gifting and still benefiting: e.g. giving away your house but continuing to live in it without paying rent. This is called a “gift with reservation of benefit” and could remain in your estate
- Gifting to trusts without advice: may trigger immediate IHT charges
Why personalised inheritance tax advice is essential
Everyone’s financial and family situation is different. That’s why generic rules can only take you so far.
A qualified inheritance tax adviser will:
- Help you decide which assets to gift, when, and to whom
- Make the most of your allowances and exemptions
- Ensure trusts, wills, and pensions are working together tax-efficiently
- Reduce your overall IHT liability while still meeting your financial needs
Without expert help, you risk giving away too much too soon or triggering unintended tax consequences.
Talk to our inheritance tax advisers today
Used correctly, the 7-year rule is a valuable tool for reducing your estate’s tax burden and passing on wealth to your loved ones. But it needs careful timing, planning, and documentation.
At Chilvester, our experienced inheritance tax advisers work with families across Chippenham, Newbury and Bristol, helping them make smart, informed decisions about gifting, estate planning, and trust use.
Get in touch today to book a free consultation and find out how we can help you protect your legacy without unwanted surprises down the line.
