Key takeaways
- Most outright gifts to individuals are potentially exempt transfers (PETs): they become fully exempt if you survive seven years.
- If you die within seven years, the gift is added back to your estate and uses your nil-rate band first.
- Taper relief reduces the tax on gifts made three to seven years before death, but only where the gift itself exceeds the nil-rate band.
- Gifts into most trusts are chargeable lifetime transfers, taxed at 20% above the nil-rate band when made.
- Earlier chargeable transfers can affect gifts going back up to 14 years.
Giving assets away during your lifetime is one of the main ways to reduce Inheritance Tax (IHT). But most gifts are not exempt straight away. They are potentially exempt transfers (PETs), whose tax treatment depends on whether you live for another seven years.
What is a potentially exempt transfer?
A PET is a gift made by an individual to another individual, or into certain trusts for disabled people, that is not covered by an immediate exemption such as the £3,000 annual exemption. Examples:
- giving a child £50,000 towards a house deposit
- transferring shares or a property to a grandchild
- paying off an adult child’s mortgage
No tax is due when a PET is made, and nothing needs to be reported at that time.
The seven-year rule
- If you survive seven years, the PET becomes fully exempt and drops out of the IHT calculation.
- If you die within seven years, the PET becomes chargeable. It is added back at its value when the gift was made, and set against your nil-rate band before the rest of your estate.
Example: a failed PET within the nil-rate band
Rachel gives her son £200,000 in 2023 (ignoring her annual exemptions for simplicity) and dies in 2026, leaving an estate of £400,000 (no home passing to direct descendants).
| Amount | |
|---|---|
| Gift added back | £200,000 |
| Covered by nil-rate band | £200,000 |
| Nil-rate band left for the estate | £125,000 |
| Estate taxable (£400,000 − £125,000) | £275,000 |
| IHT on the estate at 40% | £110,000 |
The gift itself is not taxed because it fell within the nil-rate band, but it used £200,000 of the band, increasing the tax on the estate by £80,000. Had Rachel survived seven years, the full £325,000 band would have been available to the estate.
Taper relief
Where a failed PET exceeds the nil-rate band, tax is due on the gift itself, payable by the recipient. Taper relief reduces that tax if death was more than three years after the gift:
| Years between gift and death | Tax on the gift reduced by | Effective rate |
|---|---|---|
| Less than 3 | 0% | 40% |
| 3 to 4 | 20% | 32% |
| 4 to 5 | 40% | 24% |
| 5 to 6 | 60% | 16% |
| 6 to 7 | 80% | 8% |
| 7 or more | Not taxable | 0% |
Taper relief reduces the tax, not the value of the gift, and only matters when gifts exceed the nil-rate band. It does nothing for the effect of the gift on the nil-rate band available to the estate.
Chargeable lifetime transfers
Gifts into most trusts, such as discretionary trusts, are chargeable lifetime transfers (CLTs):
- they are taxed at 20% when made, on the amount above the available nil-rate band
- if you die within seven years, the tax is recalculated at 40% with credit for tax already paid (and taper relief)
- they must be reported to HMRC on form IHT100 if above the reporting limits
See trusts and Inheritance Tax.
The 14-year shadow
To work out how much nil-rate band is available for a gift, you look back seven years from that gift. So a chargeable lifetime transfer made, say, six years before a PET can reduce the nil-rate band available for that PET, which in turn affects the estate. In effect, a CLT can cast a shadow up to 14 years before death. Making PETs before CLTs, rather than after, can avoid this.
Gifts with reservation
If you give something away but keep a benefit from it, such as continuing to live in a house you gave to your children without paying full rent, the gift is treated as still part of your estate, however long you live. See IHT planning strategies.
Practical points
- Keep records of gifts, dates and values. Executors must report gifts made in the seven years before death.
- Use exemptions first: the annual, small gifts and wedding exemptions reduce or remove PETs. See gift exemptions.
- Consider life insurance: a seven-year term policy written in trust can cover the tax if the donor dies early.
- Capital Gains Tax: gifts of assets other than cash can trigger CGT for the donor at market value.
Frequently asked questions
What is the 7-year rule for Inheritance Tax?
Gifts to individuals become exempt from Inheritance Tax if the giver survives seven years. If they die sooner, the gift is brought back into account.
Who pays Inheritance Tax on a gift if the giver dies?
If a gift exceeds the nil-rate band, the recipient pays the tax on it. The estate pays tax on the rest of the estate, which may be higher because the gift used the nil-rate band.
Does taper relief reduce the value of the gift?
No. It reduces the tax payable on the gift itself, and only where the gift exceeds the available nil-rate band.
Do I have to tell HMRC when I make a gift?
Not for potentially exempt transfers. Chargeable lifetime transfers into trusts may need reporting, and executors report all gifts in the seven years before death.
Sources
Rates, thresholds and rules in this guide were checked against HMRC and GOV.UK guidance in October 2026. Tax rules change, so check the current position on GOV.UK or with a qualified adviser before acting. This guide is general information, not personal advice.