The 7-Year Rule Explained: How to Gift Money Tax-Efficiently in the UK

Inheritance tax (IHT) is often called the most hated tax in Britain. At 40% above the threshold, it can take a significant chunk of what you have spent a lifetime building. But with proper planning, most families can legally reduce or eliminate their IHT liability.

The 7-year rule is the cornerstone of IHT planning. Understand it properly, and you can pass wealth to your children and grandchildren without giving 40% to the government.

Understanding Inheritance Tax Basics
The 7-Year Rule Explained
Taper Relief: The Sliding Scale
Types of Gifts: PETs vs CLTs
Tax-Free Gifting Exemptions
Gifts from Surplus Income
The Residence Nil-Rate Band
Planning Strategies
Record Keeping Requirements
Common Mistakes to Avoid
FAQ
Next Steps

Understanding Inheritance Tax Basics {#understanding-inheritance-tax-basics}

When Does IHT Apply?

Inheritance tax is charged on your estate (everything you own minus debts) when you die. It applies if your estate exceeds the nil-rate band thresholds.

Current thresholds (2025/26, frozen until 2030):

Threshold	Amount	Applies To
Nil-Rate Band (NRB)	£325,000	Everyone
Residence Nil-Rate Band (RNRB)	£175,000	Family home passed to direct descendants
Combined (single person)	£500,000	If qualifying for RNRB
Combined (married couple)	£1,000,000	If transferring unused allowances

The tax rate: 40% on everything above the threshold (36% if leaving 10%+ to charity).

Who Pays?

Beneficiaries pay the IHT on their inheritance, unless your will specifies that certain gifts are paid "free of tax" (meaning the residue of your estate absorbs the tax).

For gifts made during your lifetime, the recipient may be liable if tax is due and you die within 7 years.

The 7-Year Rule Explained {#the-7-year-rule-explained}

The 7-year rule is simple in principle:

If you make a gift and survive for 7 years, that gift is completely outside your estate for IHT purposes.

This means:

The gift is not counted when calculating your estate value
No inheritance tax is due on that gift
The recipient keeps 100% of what you gave

If you die within 7 years:

The gift is brought back into your estate calculations
It may be subject to inheritance tax
Taper relief may reduce the tax (see below)

How It Works in Practice

Example:

Sarah has an estate worth £800,000. She gives her daughter £200,000 in 2024.

Scenario A: Sarah lives until 2032 (8+ years)

The £200,000 gift is completely exempt
Sarah's estate at death: £600,000 (assuming no growth)
IHT liability (after £500,000 threshold): £40,000 (40% of £100,000)

Scenario B: Sarah dies in 2027 (3 years after gift)

The £200,000 gift is added back to estate calculations
Total estate: £800,000
IHT on gift: £200,000 x 40% = £80,000 (but taper relief may apply)
IHT on remaining estate: £300,000 (£600,000 - £325,000 NRB already used) x 40% = £120,000

Taper Relief: The Sliding Scale {#taper-relief-the-sliding-scale}

If you die between 3 and 7 years after making a gift, taper relief reduces the IHT rate on that gift. The tax does not gradually reduce from day one - the full 40% applies for the first 3 years.

Important Taper Relief Points

Taper relief only applies if:

The gift exceeds the nil-rate band available at the time of death
There is actually tax to pay on the gift

Example:

John gives his son £400,000 and dies 5 years later. The nil-rate band is £325,000.

Taxable amount: £400,000 - £325,000 = £75,000
Normal rate: £75,000 x 40% = £30,000
After taper relief (5-6 years = 16%): £75,000 x 16% = £12,000

Tax saved by taper relief: £18,000

Types of Gifts: PETs vs CLTs {#types-of-gifts-pets-vs-clts}

Not all gifts are treated the same for inheritance tax purposes.

Potentially Exempt Transfers (PETs)

Most gifts between individuals are PETs. They are:

Immediately exempt when made (no tax due at the time)
Become fully exempt if you survive 7 years
May become chargeable if you die within 7 years

Examples of PETs:

Cash gifts to children or grandchildren
Paying off someone's mortgage
Gifts of shares or investments
Property (though CGT may apply separately)

Chargeable Lifetime Transfers (CLTs)

Gifts to most trusts are CLTs. They are:

Immediately chargeable to IHT at 20% if they exceed the nil-rate band
Subject to further tax if you die within 7 years (up to additional 20%)
The nil-rate band is used up by CLTs before PETs

Why this matters:

If you make CLTs within 7 years of death, they use up your nil-rate band first. This can drag gifts that would have been exempt (PETs) into the tax net.

Tax-Free Gifting Exemptions {#tax-free-gifting-exemptions}

Several exemptions allow you to make gifts that are immediately free from IHT, with no 7-year wait.

Annual Exemption: £3,000

Every person can give away £3,000 per tax year completely free of IHT. This exemption:

Can be used for one gift or spread across many
Can be carried forward one year if unused (maximum £6,000 in one year)
Applies per donor (a couple can give £6,000 per year)

Small Gifts Exemption: £250

You can give any number of people up to £250 each per tax year, provided:

The recipient has not received any part of your £3,000 annual exemption
The £250 is a complete gift (not part of a larger gift)

Strategy: Use the £3,000 annual exemption for major gifts, then £250 gifts for others.

Wedding/Civil Partnership Gifts

Special exemptions for gifts on the occasion of a wedding or civil partnership:

From	Maximum Exempt Gift
Parent	£5,000
Grandparent	£2,500
Other relative	£1,000
Anyone else	£1,000

These are in addition to the annual exemption.

Maintenance of Family

Gifts for maintenance of:

Your spouse or civil partner
Your children under 18, or over 18 if in full-time education
Dependent relatives

These are exempt with no limit, provided they are for maintenance (living expenses, education, training).

Gifts to Spouses and Civil Partners

Gifts between spouses or civil partners are completely exempt with no limit, provided both are UK domiciled. You can transfer your entire estate to your spouse tax-free.

Warning: This simply defers the tax problem. When the surviving spouse dies, their estate (now larger) faces IHT.

Gifts to Charities

Gifts to registered UK charities are exempt with no limit. Leaving 10%+ of your net estate to charity reduces the IHT rate on the rest from 40% to 36%.

Gifts from Surplus Income {#gifts-from-surplus-income}

This is one of the most powerful but underused IHT exemptions.

The Rules

Gifts from surplus income are immediately exempt (no 7-year wait) if:

They come from income, not capital - salary, pension, dividends, rental income
They are part of normal expenditure - regular, habitual pattern
You can afford them - your remaining income maintains your normal lifestyle

What Counts as Surplus Income

Income minus:

All living expenses
Tax payments
Regular savings you make
Any committed expenditure

= Surplus available for gifting

Examples

Regular premium payments: Paying £500/month for your child's life insurance policy from your pension income. Immediately exempt, no limit.

School fees: Paying £15,000/year for grandchildren's school fees from dividend income. Immediately exempt if you have surplus income after your own expenses.

Monthly gifts: Giving each of your three children £500/month from your salary. £18,000/year immediately exempt if genuinely surplus.

Record Keeping is Critical

For surplus income gifts to qualify, your executors must prove:

The gift was made from income (not capital)
It was regular/habitual
You maintained your normal standard of living

Keep:

Bank statements showing income and outgoings
Evidence of the gifting pattern
Records of your normal expenditure

The Residence Nil-Rate Band {#the-residence-nil-rate-band}

The Residence Nil-Rate Band (RNRB) provides an additional £175,000 allowance when passing your home to direct descendants.

Who Qualifies

To use the RNRB:

You must own a home (or have owned one that was sold after downsizing)
It must pass to your direct descendants (children, grandchildren, step-children)
Your estate must be under £2 million (tapered above this)

Direct Descendants Include

Children (including adopted and step-children)
Grandchildren
Great-grandchildren
Spouses of the above

Does Not Include

Siblings
Nieces and nephews
Friends
Charities

The Taper for Larger Estates

If your estate exceeds £2 million, the RNRB is reduced by £1 for every £2 over the threshold.

Estate Value	RNRB Available
£2,000,000 or less	£175,000
£2,100,000	£125,000
£2,200,000	£75,000
£2,350,000 or more	£0

Transferable Allowances

If your spouse dies first and does not use their RNRB (or NRB), the unused percentage can be transferred to the surviving spouse.

Maximum for a married couple:

£650,000 (2 x £325,000 NRB)
£350,000 (2 x £175,000 RNRB)
Total: £1,000,000

Planning Strategies {#planning-strategies}

Strategy 1: Use Your Annual Exemptions

Start gifting £3,000 per year (£6,000 per couple) immediately. Over 20 years, this removes £120,000 from your estate with no 7-year risk.

Strategy 2: Early Significant Gifts

If you have assets well over the IHT threshold and are in good health, consider making substantial gifts early. The earlier you start the 7-year clock, the more likely you are to survive it.

Strategy 3: Regular Gifts from Income

Set up regular payments that qualify for the surplus income exemption:

School fees for grandchildren
Pension contributions for adult children
Life insurance premiums for the next generation

Strategy 4: Help with Property Purchases

Give money for house deposits. This:

Helps your children onto the property ladder
Removes money from your estate (subject to 7-year rule)
The property value growth happens outside your estate

Strategy 5: Pension Contributions

If you die before 75, pension pots can pass to beneficiaries completely tax-free (no IHT, no income tax). After 75, they are income tax-free but may be subject to income tax on withdrawal. Pensions are outside your estate for IHT.

Strategy: Spend other assets first, let pensions grow for beneficiaries.

Strategy 6: Life Insurance in Trust

Life insurance proceeds are outside your estate if held in trust. The payout can cover any IHT liability, leaving your assets intact for beneficiaries.

Record Keeping Requirements {#record-keeping-requirements}

Your executors will need to account for all gifts made in the 7 years before your death (and potentially 14 years for trust-related calculations).

What to Record for Every Gift

Date of the gift
Description of what was given
Value at the time of gift
Recipient's full name and relationship
Which exemption you believe applies
Any conditions attached

How to Store Records

Keep a simple spreadsheet or document
Update it when gifts are made
Store with your will and other estate documents
Consider giving a copy to your executors
For surplus income gifts: keep income and expenditure records

Template Gift Record

Date	Recipient	Relationship	Asset/Amount	Value	Exemption Used	Notes
01/03/2024	John Smith	Son	Cash	£3,000	Annual exemption	Bank transfer
15/06/2024	Jane Smith	Daughter	Shares in XYZ	£50,000	PET	Gift of 1,000 shares
Monthly	Jane Smith	Daughter	School fees	£1,500/month	Surplus income	For grandchildren

Common Mistakes to Avoid {#common-mistakes-to-avoid}

Mistake 1: Gift with Reservation of Benefit

If you give something away but continue to benefit from it, it remains in your estate.

Example: You give your house to your children but continue living there rent-free. The house is still in your estate for IHT.

Solution: Pay full market rent, or genuinely move out.

Mistake 2: Not Keeping Records

Without records, your executors cannot prove when gifts were made or which exemptions apply. HMRC may assess all gifts as taxable.

Mistake 3: Forgetting Joint Assets

Half of jointly owned assets are in your estate. Giving away "your share" of the family home still leaves your spouse's share in the estate.

Mistake 4: Ignoring Death Bed Gifts

Gifts made in the final year of life face full 40% IHT with no taper relief. Making large gifts when seriously ill rarely saves tax.

Mistake 5: Not Using Both Spouses' Exemptions

Each spouse has their own £3,000 annual exemption. A couple can give £6,000 per year immediately exempt.

Mistake 6: Assuming All Gifts Are Exempt

Only specific exemptions make gifts immediately exempt. Large gifts outside these exemptions need the 7-year survival period.

Mistake 7: Forgetting Life Insurance Proceeds

Life insurance paid to your estate is subject to IHT. Put policies in trust to avoid this.

Frequently Asked Questions {#frequently-asked-questions}

Key Takeaways

The 7-year rule: Gifts become completely IHT-free if you survive 7 years after making them
Taper relief: Tax on gifts reduces after 3 years (40% > 32% > 24% > 16% > 8% > 0%)
Annual exemption: £3,000 per year is immediately tax-free with no waiting period
Nil-rate band: £325,000 standard, plus £175,000 residence nil-rate band for family homes
Surplus income gifts: Potentially unlimited if genuinely from income you do not need
Record keeping: Essential for your executors to prove gift dates and exemptions
Start early: The sooner you begin the 7-year clock, the better your chances

Next Steps {#next-steps}

Related Guides:

Do I Need a Will? - The foundation of estate planning
How to Write a Will UK - Step-by-step guide
Legal Documents Every Parent Needs - Complete checklist
Complete Family Protection Plan - Comprehensive guide
Junior ISA Guide - Tax-efficient savings for children

Last updated: January 2026. This guide is for informational purposes only and does not constitute tax or financial advice. Inheritance tax rules are complex and individual circumstances vary. Consider consulting a qualified financial adviser or solicitor for personalised advice. Tax thresholds and rates are for 2025/26 tax year and are frozen until 2030.