The 7-year rule for gifts and Inheritance Tax
The short answer: gifts become free of Inheritance Tax if you live for 7 years after making them. If you die sooner, the gift is added back to your estate and uses up your £325,000 nil-rate band first. Tax only falls on the gift itself if gifts in those 7 years exceed the nil-rate band, and then taper relief reduces it after 3 years. Some gifts, such as £3,000 a year and gifts from surplus income, are exempt straight away.
Gifts that are exempt straight away
| Annual exemption | £3,000 a year in total, and last year's unused amount |
| Small gifts | Up to £250 per person, to as many people as you like (not someone who also gets the £3,000) |
| Wedding or civil partnership gifts | £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else |
| Regular gifts from income | Unlimited, if from surplus income and they don't reduce your standard of living |
| Spouse or civil partner | Unlimited, if they live in the UK |
| Charities and political parties | Unlimited |
Gifts from income are the most powerful and least used. Paying a grandchild's school fees or a monthly sum into a child's savings from your pension income can be exempt, but keep records showing it came from income, was regular and left you enough to live on.
Other gifts: potentially exempt transfers
Anything else given to a person, such as a lump sum to help with a deposit, is a potentially exempt transfer. It becomes fully exempt after 7 years. If you die within 7 years:
- The gift is added back and uses up your nil-rate band before the rest of your estate.
- If gifts in the 7 years total less than £325,000, there is no tax on the gift itself, but your estate has less nil-rate band left, so the estate pays more.
- If gifts are over £325,000, the person who received the gift may pay tax on the excess, with taper relief.
Taper relief
| Years between gift and death | Tax rate on the gift | On £100,000 over the nil-rate band |
|---|---|---|
| Less than 3 | 40% | £40,000 |
| 3 to 4 | 32% | £32,000 |
| 4 to 5 | 24% | £24,000 |
| 5 to 6 | 16% | £16,000 |
| 6 to 7 | 8% | £8,000 |
| 7 or more | 0% | £0 |
The example is a single gift of £425,000, with no other gifts. Taper relief reduces the tax, not the value of the gift, so it only helps where the gift is over the nil-rate band.
Gifts that don't work
- Gifts with reservation of benefit: giving your home away but living in it rent-free, or giving money but still using it. These stay in your estate.
- Gifts into most trusts: taxed at 20% immediately above the nil-rate band, with their own 7-year and 14-year rules.
- Gifts of assets that have grown: may trigger Capital Gains Tax for you now. See how to reduce Capital Gains Tax.
Pensions and the 7-year rule
From April 2027, unused pensions count towards your estate, so some people are drawing more from pensions to gift, either as regular gifts from income or as lump sums that start the 7-year clock. See pensions and Inheritance Tax and the threshold for couples.
A worked example
Jean gives her son £100,000 towards a house, then dies four and a half years later, leaving an estate of £400,000 with no home going to descendants.
- The gift is under the £325,000 nil-rate band, so no tax falls on the gift itself, and taper relief doesn't apply.
- But it uses £100,000 of the band, leaving £225,000 for the estate.
- The estate pays 40% on £175,000: £70,000.
- Had Jean lived seven years, the estate would have paid £30,000, £40,000 less.
Life insurance written in trust, covering the possible tax for seven years, is one way families plan for this.
Keeping records
Keep a simple log of every gift: the date, who received it, the amount, and which exemption you are using. For gifts from income, keep a yearly note of your income and spending, showing the gifts came from surplus income. Executors must report gifts made in the seven years before death, so a clear log saves your family time and stress.
Rules for 2026/27. This is general information, not tax advice.
Common questions
What is the 7-year rule for Inheritance Tax?
Gifts you make are free of Inheritance Tax if you live for seven years after making them. If you die within seven years, the gift may be taxed and uses up some of your nil-rate band.
How much can I give away tax-free each year?
£3,000 a year under the annual exemption, plus unused allowance from the previous year. You can also give up to £250 to any number of people, wedding gifts, and regular gifts from surplus income.
What is taper relief?
If you die between three and seven years after a gift, and the gift is over the nil-rate band, the tax on it is reduced on a sliding scale, from 32% at three to four years down to 8% at six to seven years.
Can I give my house to my children and keep living in it?
Not without problems. If you keep living there rent-free, it is a gift with reservation of benefit and still counts as part of your estate, however long you live.
Do I need to keep records of gifts?
Yes. Your executors will need to know about gifts made in the seven years before death, so keep a note of dates, amounts and recipients, and evidence for gifts from income.