What is the 7-year rule for inheritance tax gifts?

Lifetime gifts to individuals (potentially exempt transfers) become completely free from IHT if the donor survives for 7 full years after making the gift. If the donor dies within 7 years, the gift may be subject to IHT. The 7-year rule applies to potentially exempt transfers (PETs) — most lifetime gifts to individuals (not to trusts). When a gift is made, it is 'potentially exempt' — it will only become fully exempt if the donor survives for 7 full years. If the donor dies within 7 years of the gift, the gift is brought back into account for IHT purposes. The gift is added to the estate and may be subject to IHT, depending on the total value of gifts and the estate. The 7-year clock starts from the date the gift is made (the date of the transfer). The order in which gifts are brought into account is chronological — the most recent gifts are counted first against the nil-rate band. Relevant legislation: Inheritance Tax Act 1984, Section 3A (potentially exempt transfers); Section 4 (chargeable transfers). Example: A parent gifts £500,000 to their child in January 2020. If the parent survives until January 2027 (7 years), the gift is completely free from IHT. If the parent dies in January 2025 (5 years after the gift), the gift is brought back into account. Taper relief at 40% applies, reducing the effective IHT rate from 40% to 24%. The IHT on the gift would be approximately £42,000 (if the nil-rate band has been used by the estate). Common mistake: Assuming that gifts are immediately tax-free. Most lifetime gifts are only free from IHT if the donor survives 7 years. Planning should account for the possibility of death within the 7-year period.

What is the annual exemption for inheritance tax?

The annual exemption allows you to gift up to £3,000 per tax year free from IHT, regardless of the 7-year rule. If unused, it can be carried forward one year. Small gifts of up to £250 per recipient are also exempt. The annual exemption is one of the simplest IHT exemptions. You can gift up to £3,000 per tax year (6 April to 5 April) without it counting as a potentially exempt transfer. The exemption is per individual, so a married couple can gift up to £6,000 per year. If the annual exemption is not used in one tax year, it can be carried forward to the next tax year (but only one year — it cannot be accumulated indefinitely). The carried-forward exemption is used after the current year's exemption. In addition to the annual exemption, you can make small gifts of up to £250 per recipient per year, and these are exempt regardless of the 7-year rule. A recipient can receive both a small gift and a share of the annual exemption in the same year. Relevant legislation: Inheritance Tax Act 1984, Section 19 (annual exemption); Section 20 (small gifts). Example: A grandparent gifts £3,000 to each of their two grandchildren in 2025/26 (using the annual exemption and the previous year's carried-forward exemption). The total gift of £6,000 is immediately exempt from IHT. If the grandparent also gives each grandchild £250 as a birthday gift, those are exempt as small gifts (up to £250 per recipient per year). Total tax-free gifting: £6,500. Common mistake: Not using the annual exemption every year. The exemption cannot be accumulated beyond one year, so failing to use it means losing it. Regular annual gifting is a simple and effective IHT planning strategy.

Can I gift from surplus income without paying IHT?

Yes. Gifts from surplus income are exempt from IHT immediately, regardless of the 7-year rule. The gifts must be regular, from income (not capital), and must not reduce your standard of living. The 'normal expenditure out of income' exemption is one of the most valuable IHT exemptions. Gifts that meet all three of the following conditions are immediately exempt from IHT: (1) The gift is part of the donor's normal expenditure — it must be regular and habitual (e.g., monthly or annual gifts). One-off gifts do not qualify. (2) The gift is made from income — the donor's income after tax must be sufficient to cover the gift and their normal living expenses. The gift must come from income, not from capital. (3) The gift does not reduce the donor's standard of living — the donor must be able to maintain their normal lifestyle after making the gift. The exemption requires detailed record-keeping: the donor must demonstrate that they have surplus income each year and that the gifts were regular. This exemption is powerful because there is no limit on the amount — a wealthy individual with significant surplus income could gift substantial amounts each year, all immediately exempt from IHT. Relevant legislation: Inheritance Tax Act 1984, Section 21 (normal expenditure out of income). Example: A retiree has a pension income of £60,000 per year and living expenses of £40,000. They have £20,000 of surplus income. They make a regular monthly gift of £1,000 to their child (£12,000 per year). The gifts qualify as 'normal expenditure out of income' and are immediately exempt from IHT, regardless of the 7-year rule. Over 10 years, £120,000 is removed from the estate with no IHT. Common mistake: Assuming that any gift from income qualifies. The gift must be regular (not one-off), from surplus income (not capital), and must not reduce the donor's standard of living. Detailed records are essential.

What are the wedding gift exemptions for IHT?

You can make tax-free wedding gifts of up to £5,000 to a child, £2,500 to a grandchild, and £1,000 to anyone else. These gifts are immediately exempt from IHT, regardless of the 7-year rule. Wedding gifts are exempt from IHT up to specific limits, depending on the relationship between the donor and the person getting married: (1) £5,000 to a child of the donor (including step-child and adopted child). (2) £2,500 to a grandchild (or great-grandchild) of the donor. (3) £1,000 to any other person. (4) £2,500 to a party to a civil partnership (where the donor is a parent or grandparent). The gift must be made on or before the wedding, and the wedding must actually take place. If the wedding is cancelled, the exemption is lost and the gift becomes a PET. The wedding gift exemption is in addition to the annual exemption and small gifts exemption — a recipient can receive a wedding gift and a share of the annual exemption in the same year. The exemption is per donor per wedding — both parents can each gift £5,000 to the same child. Relevant legislation: Inheritance Tax Act 1984, Section 22 (gifts on marriage). Example: A parent gifts £5,000 to their child on the occasion of their wedding, and also gifts £3,000 from the annual exemption in the same year. The total gift of £8,000 is immediately exempt from IHT. Both parents can each make these gifts, so a child could receive £16,000 from their parents on their wedding, all tax-free. Common mistake: Making the gift after the wedding. The wedding gift exemption requires the gift to be made on or before the wedding. If the gift is made after the wedding, it does not qualify for the exemption and becomes a PET.

Should I use life insurance to cover IHT on gifts within 7 years?

Yes, life insurance written in trust can be an effective way to cover the IHT risk on gifts within the 7-year period. The policy pays out on death, providing funds to pay any IHT due on failed PETs. When you make a lifetime gift (a PET), there is a risk that IHT will be payable if you die within 7 years. Life insurance can be used to cover this risk. A life insurance policy is taken out on the donor's life, with the sum assured sufficient to cover the potential IHT on the gift. The policy is written in trust (so the payout is outside the estate for IHT purposes). If the donor dies within 7 years, the insurance payout provides the funds to pay any IHT due on the gift. After 7 years, the policy can be surrendered or allowed to lapse, as the IHT risk has passed. The premiums for the policy may be treated as gifts (PETs) themselves, but if they qualify as 'normal expenditure out of income', they are immediately exempt. Life insurance for IHT planning on gifts is a specialist area, and advice should be sought to ensure the policy is structured correctly. Relevant legislation: Inheritance Tax Act 1984 (various provisions on life insurance and trusts); Financial Services and Markets Act 2000 (insurance regulation). Example: A parent gifts £500,000 to their child. The potential IHT on the gift (if within 7 years) is up to £200,000. The parent takes out a decreasing term life insurance policy for £200,000, written in trust. If the parent dies within 7 years, the policy pays out £200,000 to the trust, which is used to pay the IHT on the gift. The premiums are funded from surplus income, qualifying as 'normal expenditure out of income'. Common mistake: Not writing the life insurance policy in trust. If the policy is not in trust, the payout forms part of the estate and is itself subject to IHT, defeating the purpose of the cover.

IHT Advisory › Planning

Lifetime Gifting & the 7-Year Rule

Lifetime gifting is one of the simplest and most effective IHT planning tools. Understand the 7-year rule, taper relief, annual exemptions, and how to gift strategically to reduce IHT.

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Lifetime gifting is one of the most accessible and effective inheritance tax planning strategies. By making gifts during your lifetime, you can reduce the value of your estate and the IHT payable on death. The 7-year rule means that gifts become completely free from IHT if you survive for 7 years after making them. Understanding the rules, exemptions, and taper relief is essential for effective gifting.

Potentially Exempt Transfers (PETs)

Most lifetime gifts to individuals are potentially exempt transfers (PETs). A PET is a gift that becomes exempt from IHT if the donor survives for 7 years after making the gift. If the donor dies within 7 years, the gift is brought back into account for IHT, and may be subject to tax. PETs are the most common form of lifetime gifting and include gifts of cash, property, and shares to individuals (but not to trusts, which are chargeable transfers).

Taper Relief

If the donor dies within 7 years of making a gift, taper relief may reduce the IHT payable on the gift. Taper relief applies on a sliding scale: 0% reduction in years 1-3 (full IHT rate applies); 20% reduction in year 4 (effective rate 32%); 40% reduction in year 5 (effective rate 24%); 60% reduction in year 6 (effective rate 16%); 80% reduction in year 7 (effective rate 8%). Taper relief only applies to the IHT payable above the nil-rate band — if the gift falls within the nil-rate band, no IHT is due and taper relief is irrelevant.

Annual Exemptions and Other Exempt Gifts

Several types of gifts are exempt from IHT regardless of the 7-year rule: (1) Annual exemption — £3,000 per year (can be carried forward one year if unused). (2) Small gifts — up to £250 per recipient per year. (3) Wedding gifts — up to £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else. (4) Gifts from surplus income — regular gifts from income that does not reduce the donor's standard of living. (5) Gifts to charity and political parties. These exemptions can be used alongside PETs to maximise the tax efficiency of gifting.

Gifting Strategies

Effective gifting strategies include: (1) Using the annual exemption every year. (2) Making larger gifts as PETs early, to start the 7-year clock. (3) Using gifts from surplus income (which are immediately exempt). (4) Combining wedding gifts with annual exemptions. (5) Using life insurance to cover the IHT risk on gifts within the 7-year period. The right strategy depends on the donor's circumstances, the amount to be gifted, and the family situation.

Key Points

What You Need to Know

Lifetime gifts to individuals are potentially exempt transfers (PETs)
Gifts become completely IHT-free if the donor survives 7 years
Taper relief reduces IHT on gifts made 3-7 years before death
Annual exemption of £3,000 per year (carry forward one year)
Gifts from surplus income are immediately exempt from IHT

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Inheritance Tax Frequently Asked Questions

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