If someone you have lost made significant gifts in the years before they died, those gifts may need to be reported to HMRC and could affect how much inheritance tax the estate owes. The central rule is this: any gift made more than seven years before death is outside the estate for IHT purposes. Gifts made within seven years may be taxable – but the closer to seven years, the less tax applies, thanks to taper relief.
This is one of the more complicated parts of estate administration, and it comes at an already difficult time. This guide explains the rules as clearly as possible: what counts as a gift, how the seven-year clock works, which exemptions apply, how gifts to trusts differ from gifts to people, and what the executor needs to report on form IHT403. For non-gift exemptions – including business property relief, agricultural relief, and the charity exemption – see our guide to inheritance tax exemptions and reliefs.
What counts as a gift for inheritance tax
For IHT purposes, a gift is broadly any transfer of value – something given away for less than it is worth, so that the giver’s estate is reduced as a result. The following all count as gifts (gov.uk – Gifts and Inheritance Tax):
- Money – cash transfers to individuals, whether by bank transfer or physically
- Property and land – including transferring a home to a family member
- Household and personal possessions – furniture, jewellery, antiques, vehicles
- Stocks and shares (listed shares, or unlisted shares held for less than two years before death)
- Selling something below market value – the difference between the market price and what was paid is treated as a gift
Anything left in a will is not a gift – it is part of the estate and taxed accordingly. It is only transfers made during the person’s lifetime that fall under the gift rules.
What is not a gift
Some transfers are exempt from IHT entirely and do not count towards the seven-year total:
- Gifts to a spouse or civil partner (if both are UK domiciled, or long-term UK resident from 6 April 2025)
- Gifts to UK-registered charities
- Gifts to political parties that meet certain conditions
- Regular gifts from income (see below)
The 7-year rule
The seven-year rule applies to what HMRC calls potentially exempt transfers (PETs) – outright gifts to individuals that are not immediately chargeable. While the donor is alive, a PET is conditional: survive seven years and the gift falls outside the estate entirely. Die within seven years and it becomes a chargeable transfer (gov.uk – Gifts and Inheritance Tax).
The seven-year period is measured in calendar years from the date the gift was made to the date of death, not in tax years.
When gifts become taxable
If the person died within seven years of making a gift, the gift is added back into the estate for IHT purposes. The gifts are applied against the nil-rate band (currently £325,000) in chronological order, oldest gifts first. Once gifts exceed the nil-rate band, IHT becomes payable on the excess.
Crucially, the nil-rate band is used up by gifts before it applies to the rest of the estate. If gifts totalling £325,000 were made in the last seven years, there may be no nil-rate band left to shelter anything else.
Taper relief
If the donor survived at least three years after making a gift, taper relief reduces the IHT rate on that gift. Taper relief only applies to gifts that exceed the nil-rate band – it reduces the tax charged, not the value of the gift itself (HMRC Inheritance Tax Manual – IHTM14612).
| Years between gift and death | IHT rate on the excess |
|---|---|
| 0–3 years | 40% (full rate) |
| 3–4 years | 32% |
| 4–5 years | 24% |
| 5–6 years | 16% |
| 6–7 years | 8% |
| 7+ years | 0% (outside the estate) |
These rates are verified against HMRC guidance (gov.uk – Gifts and Inheritance Tax, HMRC IHTM14612).
A practical note on taper relief: it is often misunderstood. If a gift of £100,000 was made five years before death and the nil-rate band is still fully available, no IHT is due on that gift, because the gift is within the nil-rate band and taper relief never comes into play. Taper relief only matters when the cumulative total of gifts exceeds £325,000.
Potentially exempt transfers vs chargeable lifetime transfers
Not every lifetime gift is a potentially exempt transfer. The distinction matters because it changes when tax is charged.
Potentially exempt transfers (PETs) are outright gifts from one individual to another individual, or to certain trusts for disabled people. No tax is due when a PET is made. It only becomes chargeable if the donor dies within seven years.
Chargeable lifetime transfers (CLTs) are gifts that are assessed for IHT at the moment they are made. The most common CLT is a gift into most types of trust, for example a discretionary trust. Gifts to certain companies can also be chargeable. Unlike a PET, a CLT does not wait seven years to find out its tax position (HMRC Inheritance Tax Manual – IHTM04067).
How a CLT is taxed
When a chargeable lifetime transfer is made, HMRC adds it to any other chargeable transfers in the previous seven years. If the running total stays within the £325,000 nil-rate band, no lifetime tax is due. If it takes the total above the nil-rate band, IHT is charged at the lifetime rate of 20% on the excess at the time of the gift (gov.uk – Trusts and Inheritance Tax).
If the donor then dies within seven years, the transfer is reassessed at the full death rate (40%, reduced by taper relief where the donor survived at least three years), with credit given for the 20% lifetime tax already paid. If the donor survives seven years, no further IHT is due on the transfer.
Gifts into trust are a specialist area with their own reporting and periodic charges. If you are administering an estate that involves a trust, or considering setting one up, professional advice from a solicitor or tax adviser is strongly recommended.
Annual exemptions and small gifts
Several exemptions mean that everyday giving does not trigger IHT at all. These gifts never enter the seven-year running total.
Annual gift allowance
A person can give away £3,000 per tax year without it being counted as part of their estate for IHT. This is the annual exemption. If it is not used in full in one tax year, the unused portion can be carried forward to the next year, but only one year and only once. So the maximum that can be given under this exemption in a single year is £6,000, using the current and previous year’s allowance together (gov.uk – Gifts and Inheritance Tax).
The annual exemption applies to total gifts across the year, not per recipient.
Small gifts exemption
A person can give any number of gifts of up to £250 per person per tax year free of IHT, provided no other exemption has been used in relation to the same person. So £250 each could go to 20 different people in a single tax year with no IHT implications. This cannot be combined with the annual exemption: giving one person £3,000 plus £250 in the same year does not work.
Wedding and civil partnership gifts
Gifts made on or shortly before a wedding or civil partnership registration are exempt up to set limits (gov.uk – Gifts and Inheritance Tax):
| Relationship of giver to couple | Tax-free limit per person |
|---|---|
| Parent of the bride or groom | £5,000 |
| Grandparent or great-grandparent | £2,500 |
| Anyone else | £1,000 |
These can be combined with the annual exemption. A parent could give £8,000 to a child on their wedding day (£5,000 wedding exemption plus £3,000 annual exemption) without IHT implications.
Normal expenditure out of income
Regular gifts made as part of a person’s normal expenditure out of income are exempt, with no upper limit. For people with reliable income above their living costs this is one of the most useful exemptions, and it is also one HMRC scrutinises most closely. It is set out in section 21 of the Inheritance Tax Act 1984.
To qualify, a gift must meet all three of the following conditions (HMRC Inheritance Tax Manual – IHTM14231):
- It formed part of the donor’s normal (typical or habitual) expenditure
- It was made out of income, not out of capital
- It left the donor with enough income to maintain their usual standard of living
What “normal” means
HMRC takes “normal” to mean normal for that particular donor, not for an average person. The key test is whether there was a settled pattern of giving. HMRC looks at the frequency and amount of the gifts, their nature, who received them, and the reasons behind them (HMRC Inheritance Tax Manual – IHTM14241).
A regular standing order to a child, or annual payments towards a grandchild’s school fees, fits this pattern well. A single gift can sometimes qualify if it was clearly intended to be the first in a series and there is evidence of that intention, for example a letter or a written commitment.
What “income” means
Income for this exemption is net income after tax: salary, pension income, dividends, rental income, and interest. A drawdown income from a pension that the donor has chosen to take counts as income once received. Capital does not qualify, and neither does income that has been saved up and left to roll into capital over a long period. HMRC may treat income that has been accumulated for more than around two years as having become capital, although each case turns on its facts.
Why the income-versus-capital line catches people out
The exemption only covers gifts made out of income. Selling an asset, or drawing down a lump sum from savings, and then giving the proceeds away is a gift of capital and does not qualify, however regular the payments look.
A common trap is a donor who believes they are giving out of income but is in fact slowly depleting their capital. If the gifts exceed the donor’s real surplus income year after year, the shortfall is being funded from capital, and only the part funded from income qualifies for the exemption. This is why HMRC expects a year-by-year comparison of income against expenditure and gifts, and why keeping records as you go is so much easier than reconstructing them afterwards.
How the exemption is claimed
The normal expenditure out of income exemption is not automatic. The executor claims it after death by completing the income and expenditure section of form IHT403 (gov.uk – Inheritance Tax: gifts and other transfers of value (IHT403)). This requires setting out the donor’s income and outgoings for each year in which the gifts were made, to show that the gifts came from surplus income and left enough to maintain the donor’s standard of living. Without that evidence, HMRC may refuse the exemption and treat the gifts as PETs subject to the seven-year rule.
Gifts with reservation of benefit
A gift with reservation of benefit is one where the donor continues to benefit from the asset after giving it away. The most common example is giving away a home but continuing to live in it rent-free. In this situation, the gift does not leave the estate for IHT purposes – HMRC treats the asset as still belonging to the donor, regardless of how long ago the transfer took place (gov.uk – Gifts and Inheritance Tax).
This is a trap that catches people who try to reduce their IHT bill by transferring a home to their children while still living in it. The seven-year clock does not apply while the reservation of benefit continues. The asset stays in the estate until the reservation ends, at which point, if the donor then survives a further seven years, it may eventually leave the estate.
If the donor paid market-rate rent on the property after the transfer, the reservation of benefit rules do not apply, but this needs to be documented carefully.
Associated operations
HMRC has a further power to stop artificial schemes. Under the associated operations rule in section 268 of the Inheritance Tax Act 1984, a series of separate but connected transactions can be treated as a single transfer of value. This applies where the operations affect the same property or form a chain of linked steps, even if they happen at different times or involve different people (HMRC Inheritance Tax Manual – IHTM14822).
In practice this means a gift cannot be dressed up as a sequence of small, individually harmless steps if, taken together, they amount to one larger gift. Anyone considering a structured arrangement to reduce IHT should take professional advice before acting, because HMRC can look at the substance of what was done, not just its form.
Pension funds and inheritance tax from April 2027
A significant change is coming for unused pension pots. For deaths before 6 April 2027, most unused pension funds and death benefits are outside the estate for IHT, which is part of why pensions have been used for passing on wealth.
For deaths on or after 6 April 2027, under changes legislated in the Finance Act 2026, most unused pension funds and pension death benefits will be brought within the value of the deceased’s estate for inheritance tax purposes (gov.uk – Technical note: Inheritance Tax on pensions).
What this means in practice:
- What changes: unused defined contribution pots and most lump sum death benefits will count towards the estate and may attract IHT at 40% on the part above the available nil-rate band.
- What does not change: pension income already being paid is not affected, as it is spent rather than left as an unused fund. Death-in-service benefits paid from a registered pension scheme, and dependants’ scheme pensions, are expected to remain outside scope.
- Who reports it: from 6 April 2027, personal representatives, rather than pension scheme administrators, become responsible for reporting and paying any IHT due on unused pension funds.
This change also affects how gifting interacts with pensions. Money drawn from a pension as income, and then given away, is treated as a gift of income or capital under the normal gift rules described above, and is potentially subject to the seven-year rule. Leaving a pension untouched in the hope of passing it on free of IHT will, from April 2027, no longer keep that fund outside the estate. The rules are still bedding in, so anyone making decisions on this basis should take regulated financial advice.
What happens if someone dies within 7 years of making a gift
When someone dies, the executor must identify all gifts made in the seven years before death that are not covered by an exemption. The gov.uk guidance on working out IHT due on gifts sets out the process.
The running total method
Gifts are listed in chronological order and a running total is kept. The first gifts absorb the nil-rate band: until the total exceeds £325,000, no IHT is due. Once the running total crosses that threshold, IHT is due on the portion above it.
Example: a person makes three gifts:
- January 2020: £200,000 (running total: £200,000 – within NRB, no tax)
- June 2021: £100,000 (running total: £300,000 – still within NRB, no tax)
- March 2022: £57,000 (running total: £357,000 – £32,000 above NRB; IHT due on £32,000)
They die in April 2025. All three gifts fall within seven years. The March 2022 gift is taxed on £32,000, at the appropriate taper rate based on years survived.
Who pays
The recipient of the gift is responsible for paying the IHT on it. If the tax remains unpaid 12 months after death, the executor of the estate may become liable (gov.uk – Gifts and Inheritance Tax). For large or complex gifts, it is worth identifying the recipients early in estate administration and making contact.
How gifts interact with the nil-rate band for the rest of the estate
Gifts use up the nil-rate band first. If someone gave away £325,000 or more in the seven years before death, there may be no nil-rate band left for the rest of the estate, meaning the full 40% rate applies to everything above zero. This is why documenting lifetime gifts matters so much, and why our guide on the nil-rate band is worth reading alongside this one.
Documenting and reporting gifts: form IHT403
For an executor, gifts are one of the harder parts of estate administration, because the evidence sits in the deceased’s records rather than anywhere central. HMRC expects gifts made on or after 18 March 1986 to be reported, and the main tool for this is form IHT403 (gov.uk – Inheritance Tax: gifts and other transfers of value (IHT403)).
What IHT403 covers
IHT403 is the “Gifts and other transfers of value” schedule, completed alongside the full account on form IHT400 where the deceased gave away assets such as cash, property, or land. It is used to report:
- Gifts made in the seven years before death
- Gifts with reservation of benefit
- Pre-owned assets
- Claims for the normal expenditure out of income exemption, through its income and expenditure section
How an executor identifies and values gifts
The practical job for an executor is to build a complete picture of what was given away. That usually means:
- Reviewing several years of bank and building society statements for large or regular transfers out
- Asking close family members about significant gifts, loans, or transfers of property
- Checking Land Registry records if a property may have been transferred
- Valuing each gift at its value at the date it was made, not its current value
For exempt gifts (annual exemption, small gifts, wedding gifts, normal expenditure out of income), the executor still needs the underlying detail to show the exemption applies. For normal expenditure out of income in particular, the income and expenditure section of IHT403 must be completed for each relevant year.
What happens if no records exist
Where the deceased kept no record of gifts, the executor has to reconstruct the position from bank statements and other documents, which is slower and may leave gaps. If a gift cannot be evidenced as exempt, it may have to be reported as a potentially exempt transfer and brought into the seven-year calculation. Executors who are unsure whether a transaction was a gift, a loan, or an exempt payment should keep a note of their reasoning and, for larger estates, take professional advice. The executor signs the IHT account to confirm it is correct to the best of their knowledge, so reasonable care in establishing the facts matters.
Gifts between spouses and civil partners
Transfers between spouses and civil partners are entirely exempt from inheritance tax, with no limit on the amount, provided both parties are UK domiciled or, from 6 April 2025, long-term UK resident. There is no seven-year rule, no taper relief, and no annual cap. The full value of assets transferred between spouses during their lifetime passes free of IHT (gov.uk – Gifts and Inheritance Tax).
This exemption also applies to assets passing under the will. This creates the transferable nil-rate band situation covered in our nil-rate band guide. Assets left to a spouse pass free of IHT, which means the nil-rate band is unused at first death, and it is then available to be claimed by the survivor’s estate.
Common questions about gifts and inheritance tax
Does the 7-year rule apply to gifts to children?
Yes. Gifts to children are potentially exempt transfers under the same rules as gifts to anyone else. If a parent gives their adult child a cash sum or transfers a property to them, the seven-year rule applies. If the parent survives seven years, the gift falls outside the estate entirely. If not, the gift is added to the running total of gifts and taxed accordingly, with taper relief applying where the parent survived at least three years. The annual exemption (£3,000), small gifts (£250 per person), and wedding gift allowances (£5,000 from a parent) can all reduce or remove the taxable element for smaller gifts.
Does the 7-year rule apply to gifts to grandchildren?
Yes. Gifts to grandchildren are potentially exempt transfers in the same way as gifts to children, and the seven-year rule, taper relief, and running total all apply identically. Grandparents have a different wedding gift allowance: up to £2,500 to a grandchild getting married, free of IHT, on top of the £3,000 annual exemption. Regular payments towards a grandchild’s school fees or upkeep, made out of surplus income, can also be exempt under the normal expenditure out of income rule.
What is a potentially exempt transfer (PET)?
A potentially exempt transfer is an outright lifetime gift from one individual to another, or to certain trusts for disabled people, that carries no IHT at the time it is made. Its final tax treatment depends on how long the donor lives: survive seven years and it becomes fully exempt; die within seven years and it becomes a chargeable transfer, added back into the estate. Most ordinary gifts between family members are PETs.
What is taper relief?
Taper relief reduces the rate of IHT on a gift where the donor survived at least three years but died before the full seven years passed. It reduces the tax rate, not the value of the gift. The rate falls from 40% to 32% (three to four years), 24% (four to five years), 16% (five to six years), and 8% (six to seven years). It only has an effect once the cumulative total of gifts in the seven years before death exceeds the £325,000 nil-rate band, because tax is only charged on the excess.
What is the difference between a gift to a person and a gift to a trust?
A gift to another individual is a potentially exempt transfer, with no tax when it is made and full exemption if the donor survives seven years. A gift into most trusts is a chargeable lifetime transfer, assessed for IHT straight away. If the gift into trust, added to chargeable transfers in the previous seven years, takes the total above £325,000, tax is charged at 20% on the excess at the time of the gift, with a possible further charge if the donor dies within seven years. Gifts into trust are a specialist area where professional advice is important.
Can I give my house away to avoid inheritance tax?
Transferring a home to children is rarely a straightforward way to reduce IHT. If the donor continues to live in the property rent-free, the gift with reservation of benefit rules mean the home stays in the estate regardless of when the transfer happened, so the seven-year clock does not run. To remove the property, the donor would need to pay a market rent to the new owners (properly documented) or move out entirely, and then survive seven years from the date the reservation ended. The interactions with capital gains tax, stamp duty land tax, and the residence nil-rate band are complex, so advice from a solicitor or tax adviser is strongly recommended before acting.
What records do I need to keep for gifts?
Keep a dated record of every significant gift: what was given, its value at the time, who received it, and the date. For gifts claimed under the normal expenditure out of income exemption, also keep records of income and outgoings for each year, to show the gifts came from surplus income and not capital. Bank statements, transfer records, and a simple gift log all help. Where no records exist, the executor must reconstruct the position from statements, which is slower and may mean exemptions cannot be evidenced and so cannot be claimed.
Summary
The seven-year rule is central to how inheritance tax treats lifetime gifts. Gifts made more than seven years before death are outside the estate; those made within seven years may be taxable, with taper relief reducing the rate for gifts made three to seven years before death. Everyday giving is largely protected by the annual exemption (£3,000), small gifts allowance (£250 per person), wedding gift exemptions, and the normal expenditure out of income exemption for regular gifts funded from surplus income.
Two distinctions are worth holding on to: gifts to individuals are potentially exempt transfers, while gifts into most trusts are chargeable lifetime transfers taxed at the time they are made; and from 6 April 2027 most unused pension funds will form part of the estate for IHT.
For executors, the key task is building a complete picture of gifts made in the seven years before death, identifying which are covered by exemptions, reporting them on form IHT403, and calculating whether any exceed the nil-rate band. Our guide on executor duties covers this as part of the broader estate administration process.
For more on how inheritance tax works, see our inheritance tax overview and the guide to the nil-rate band.
All figures verified against HMRC and gov.uk guidance, last verified 20 June 2026. The nil-rate band of £325,000 and current exemption amounts are confirmed for 2025/26 and frozen to April 2031. The pension IHT change takes effect for deaths on or after 6 April 2027 under the Finance Act 2026. This guide covers England, Wales, and Scotland. It is for information only and does not constitute legal or tax advice. For complex estates – particularly those involving large gifts, trusts, business property, pensions, or gifts with reservation – a solicitor or tax adviser can save considerable time and money.