How does the seven year rule work for gifts and inheritance tax?
Answered 11 March 2026
I now have all the information needed to provide a comprehensive answer. Here is a full explanation of the seven-year rule for gifts and IHT:
The Seven-Year Rule for Gifts and Inheritance Tax
What the law says
The Potentially Exempt Transfer (PET) framework
The seven-year rule operates through the concept of a "potentially exempt transfer" (PET), defined in IHTA 1984, s.3A. A PET is a transfer of value made by an individual which would otherwise be a chargeable transfer, to the extent it constitutes a gift to another individual (or into certain qualifying trusts).
The key rule is set out in s.3A(4):
"A potentially exempt transfer which is made seven years or more before the death of the transferor is an exempt transfer and any other potentially exempt transfer is a chargeable transfer."
During the seven-year period, the transfer is assumed to be exempt — it only becomes chargeable if the transferor dies within those seven years.
Taper relief — reduced tax for gifts 3–7 years before death
Under IHTA 1984, s.7(4), where a chargeable transfer (including a failed PET) is made within seven years of death but more than three years before death, the tax is charged at a reduced percentage of the full death rate:
| Years before death | % of full rate charged |
|---|---|
| More than 3, up to 4 years | 80% |
| More than 4, up to 5 years | 60% |
| More than 5, up to 6 years | 40% |
| More than 6, up to 7 years | 20% |
Gifts made within 3 years of death are taxed at the full death rate (40%).
There is also a safeguard: if the taper relief calculation would produce more tax than would have been charged had the transferor not died within seven years, the taper relief provisions do not apply.
HMRC guidance / practice
Why the rule exists
HMRC explains that IHT is primarily a death charge, but without the seven-year rule it could be avoided by making gifts shortly before death. The rule therefore protects the death charge by bringing lifetime transfers made within seven years back into charge.
Gifts that survive seven years become fully exempt
Most lifetime gifts to non-exempt beneficiaries are PETs and become chargeable only if the transferor dies within seven years. If the transferor survives the transfer by seven years, the PET becomes an exempt transfer.
Interaction with the nil-rate band
When a PET fails (i.e. the donor dies within seven years), the nil-rate band (currently £325,000) is applied against the lifetime gifts first, before being applied to the death estate. This can mean the full estate is exposed to IHT at 40% if the gifts have already exhausted the nil-rate band.
Important caveat — gifts with reservation
The seven-year rule does not protect a gift where the donor retains a benefit from the gifted property (a "gift with reservation"). For example, giving away a house but continuing to live in it means the property remains in the estate regardless of how long the donor survives.
RNRB does not apply to lifetime transfers
The Residence Nil-Rate Band (RNRB) — unlike the standard nil-rate band — does not apply to lifetime transfers made within seven years of death; it only applies to the death estate itself.
Datacapture of gifts
For HMRC compliance purposes, lifetime gifts made in every tax year within the seven years before death must be recorded, except those fully covered by annual or small gifts exemptions.
Citation sources
years before the death, 80 per cent; b where the transfer is made more than four but not more than five years before the death, 60 per cent; c where the transfer is made more than five but not more than six years before the death, 40 per cent; and d where the transfer is made more than six but not more than seven years before the death, 20 per cent. 5 If, in the case of a chargeable transfer made before the death of the transferor, the tax which would fall to be charged in accordance with subsec
PART I GENERAL Rates Rates. 7 1 Subject to subsections (2), (4) and (5) below and to section 8D and Schedule 1A the tax charged on the value transferred by a chargeable transfer made by any transferor shall be charged at the following rate or rates, that is to say— a if the transfer is the first chargeable transfer made by that transferor in the period of seven years ending with the date of the transfer, at the rate or rates applicable to that value under the . . . Table in Schedule 1 to this Ac
Inheritance Tax (IHT) is primarily a tax charged on the assets owned by a person on their death (IHTM04043). If the tax did not also apply to lifetime transfers (IHTM04051), it could be avoided by transfers of a person’s assets made shortly before death. So, to protect the death charge, IHT can also be charged on transfers: made within seven years of a person’s death, or where the person who made the transfer continues to enjoy some benefit from the asset, for example by living in a house that t
On cases that are marked ‘sampled’ you will need to datacapture the lifetime gifts made in every tax year within the seven years before the deceased’s death. You do not need to datacapture gifts in any one tax year if they are fully covered by annual or small gifts exemptions.
Most lifetime gifts to non-exempt beneficiaries are Potentially Exempt Transfers (PETs) (IHTM04057) and so become chargeable only if the transferor dies within seven years of the transfer. If the transferor survives the transfer by seven years, the PET becomes an exempt transfer. This result was considered unsatisfactory on policy grounds if the transferor continued to receive a benefit from the gifted property (IHTM04030) - for example where the transferor gives their residence to their childre
extent that, by virtue of the transfer, the estate of that other individual is increased, . . . 3 Subject to subsection (6) below, a transfer of value falls within subsection (1)(c) above, as a gift into an accumulation and maintenance trust or a disabled trust, to the extent that the value transferred is attributable to property which, by virtue of the transfer, becomes settled property to which section 71 or 89 of this Act applies. 3A Subject to subsection (6) below, a transfer of value falls
PART I GENERAL Main charges and definitions Potentially exempt transfers. 3A 1 Any reference in this Act to a potentially exempt transfer is a reference to a transfer of value— a which is made by an individual on or after 18th March 1986 but before 22nd March 2006 ; and b which, apart from this section, would be a chargeable transfer (or to the extent to which, apart from this section, it would be such a transfer); and c to the extent that it constitutes either a gift to another individual or a