Lifetime Gifting and the Seven-Year Rule

Inheritance tax is charged on the value of what you own when you die, above your available allowances. In 2026/27 the nil-rate band is £325,000, and a residence nil-rate band of up to £175,000 can apply where a home passes to direct descendants. The residence band tapers away by £1 for every £2 by which the estate exceeds £2 million. Anything above the available bands is taxed at 40%, reducing to 36% where at least 10% of the net estate is left to charity.

Every pound you give away during your lifetime, provided the gift is made correctly and you survive long enough, is a pound that is no longer in your estate when the 40% charge is calculated. That is the core of lifetime gifting: it shrinks the taxable estate while you are alive, rather than leaving the whole problem to be solved on death.

Gifting is not the only tool, and it is rarely used in isolation. It sits alongside wills, trusts and reliefs, and the right combination depends entirely on your circumstances. For the wider picture, see the complete guide to inheritance tax; this guide focuses on getting the gifting mechanics right.

Several exemptions take effect immediately, with no need to survive any period of time. These are the simplest and safest gifts to make, and using them consistently year after year can move a meaningful sum out of an estate over a decade or two.

Most larger gifts to individuals that are not covered by an exemption are potentially exempt transfers, usually shortened to PETs. A PET is not taxed when you make it. If you survive seven years from the date of the gift, it falls completely outside your estate and no inheritance tax is due on it.

If you die within those seven years, the gift is brought back into the calculation. It uses up your nil-rate band first, in the order the gifts were made, and only the value above the available nil-rate band can be taxed. This is why the seven-year rule matters so much: the date of each gift, and the order of gifts, directly affects how much tax falls due if you do not survive the full period.

Gifts into most trusts work differently. They are chargeable lifetime transfers rather than PETs, and can trigger an immediate charge if they exceed the nil-rate band, with their own ongoing trust tax rules. Trusts are a specialist area in their own right; see the guide to trusts in estate planning for how they interact with gifting.

Taper relief is widely misunderstood. It does not reduce the value of the gift, and it does not apply to every gift made within seven years. It reduces the tax payable on a gift, and only where the cumulative gifts in the seven years before death exceed the nil-rate band.

If your total gifts within the seven-year period are below the £325,000 nil-rate band, those gifts simply use up the band and there is no tax to taper. Taper relief only bites on the part of a gift that sits above the available nil-rate band. Where it does apply, the relief increases with each full year survived beyond the third year, as the table below shows.

Because taper applies to the tax rather than the gift, and only above the nil-rate band, the headline percentages can give a false impression of the saving. Modelling the actual numbers for a specific gift, which the calculator above is designed to do, gives a far more realistic view than the percentages alone.

One of the most valuable and least used exemptions is for gifts made out of surplus income. A gift is immediately exempt, with no seven-year clock at all, if it meets three conditions: it forms part of your normal, regular pattern of giving; it is made out of income rather than capital; and after making it you are left with enough income to maintain your usual standard of living.

This exemption is powerful because it has no fixed annual cap. Someone with genuinely surplus income, for example a pensioner whose pensions and investment income comfortably exceed their spending, can make regular gifts of any size and have them leave the estate at once, provided the conditions are met and continue to be met over time.

The reason it is underused is that it depends entirely on evidence. HMRC will look closely at whether the gifts were genuinely habitual, genuinely from income, and genuinely affordable. Without records, executors often cannot make the claim stand up, and the gifts fall back into the seven-year framework instead.

A gift only works for inheritance tax if you actually give it away and stop benefiting from it. If you give something away but keep using it, the rules treat it as a gift with reservation of benefit, and it is counted back into your estate as though you never gave it away at all. The seven-year clock does not save it, because the gift never genuinely left your estate.

The classic example is giving the family home to your children while continuing to live in it rent-free. On paper the house belongs to the children, but because you still have the benefit of living there, HMRC treats the home as remaining in your estate for inheritance tax. The same logic applies to a holiday home you still use, or an investment whose income you continue to receive.

There are narrow ways to make such arrangements work, for example paying a full market rent for continued use of a property given away, but these have their own tax and practical consequences and are easy to get wrong. This is firmly an area to plan with a specialist before acting, because an arrangement that looks sensible can quietly fail and leave the asset fully taxable. The home is often the largest asset in an estate, and the structuring around it is covered further in the guide to wills and estate structuring.

Lifetime gifting does not happen in an inheritance tax vacuum. Giving away an asset that has risen in value, such as a second property or a share portfolio, is treated as a disposal for capital gains tax, even though no money changes hands. The gift can therefore create a capital gains tax bill for you in the year you make it, separate from any inheritance tax position. Cash gifts do not raise this issue, but gifts of assets frequently do, and the two taxes need to be weighed together rather than in isolation.

Good records are what turn a sensible gifting plan into one that actually delivers when it matters. Your executors will need to identify every gift made in the seven years before death, with the date, the recipient, the value at the time, and which exemption (if any) applied. Without that, they cannot calculate the estate correctly, claim the exemptions you were entitled to, or defend a gifts-from-income claim. The administration of an estate is demanding enough; see the probate and estate administration guide for what executors face.

A specialist estate-planning accountant brings the gifting, capital gains and record-keeping strands together so they reinforce rather than undermine each other. We do exactly this kind of lifetime gifting work; where business assets are involved, the interaction with reliefs is covered in the business relief and succession guide.