The 7-Year Rule

Key facts

Gifts (PETs) become fully exempt if the donor survives 7 years.
If the donor dies within 3 years, the gift is taxed at the full 40% rate.
Between 3 and 7 years, taper relief progressively reduces the IHT charged.
The 7-year rule applies to both PETs and CLTs.
Gifts use up the nil-rate band in chronological order (oldest first).

How the 7-Year Rule Works

The 7-year rule is one of the most important concepts in Inheritance Tax. It provides that gifts made by an individual more than 7 years before their death are completely free of IHT. This rule gives individuals a powerful tool for estate planning — by making gifts early enough, they can reduce their taxable estate and potentially save their beneficiaries significant sums in IHT.^[1]

The Gift Timeline

Years Between Gift and Death	IHT Consequence	Taper Relief
0 – 3 years	Full charge at 40%	None
3 – 4 years	Charged at 40% × 80% = 32%	20% reduction
4 – 5 years	Charged at 40% × 60% = 24%	40% reduction
5 – 6 years	Charged at 40% × 40% = 16%	60% reduction
6 – 7 years	Charged at 40% × 20% = 8%	80% reduction
7+ years	Fully exempt	N/A

Important: Taper relief reduces the tax, not the value of the gift. It only applies when the gift (combined with other chargeable transfers) exceeds the nil-rate band. If the gift is within the NRB, there is no tax to taper.

PETs and the 7-Year Rule

Potentially exempt transfers (gifts to individuals) are the most common type of gift subject to the 7-year rule. The process works as follows:^[3]

The gift is made — it is treated as exempt at the time
If the donor survives 7 years, the gift becomes fully exempt
If the donor dies within 7 years, the PET “fails” and becomes chargeable
The failed PET uses up the nil-rate band (oldest gifts first)
Any excess is taxed at 40%, reduced by taper relief if applicable

CLTs and the 7-Year Rule

Chargeable lifetime transfers (typically gifts into discretionary trusts) interact with the 7-year rule differently:^[1]

CLTs are immediately chargeable at the lifetime rate (20%) on any excess over the NRB
If the donor dies within 7 years, the CLT is recalculated at the death rate (40%)
Credit is given for any lifetime tax already paid
After 7 years, the CLT drops out of the cumulative total, potentially freeing up NRB for the estate

The Cumulative Total

IHT uses a 7-year cumulative total of chargeable transfers. When someone dies, the calculation works backwards:

Add up all chargeable transfers (failed PETs + CLTs) in the 7 years before death
Apply the NRB to the earliest transfers first
Any NRB remaining after lifetime transfers is available for the estate

Example: Emma gives £200,000 to her son in 2019 and £200,000 to her daughter in 2022. She dies in 2025. Both PETs fail. The 2019 gift uses £200,000 of the NRB. The 2022 gift uses the remaining £125,000 of NRB, with £75,000 taxable. No NRB remains for the estate.

Gifts with Reservation of Benefit

The 7-year rule does not work if the donor continues to benefit from the gifted asset. This is known as a gift with reservation of benefit (GROB). Common examples include:^[1]

Giving away your home but continuing to live in it rent-free
Giving away investments but continuing to receive the income
Giving away a painting but keeping it on your wall

If the reservation continues until death, the asset is treated as still part of the estate for IHT purposes — the 7-year clock never starts.

Planning Tips

Start early: The sooner you make gifts, the more likely they will become exempt
Keep records: Document every significant gift with dates and values
Use exemptions first: The £3,000 annual exemption, small gifts, and normal expenditure exemptions are immediately effective — no 7-year wait
Consider insurance: A 7-year decreasing term policy can cover the potential IHT on large gifts

Frequently Asked Questions

What is the 7-year rule for Inheritance Tax?

The 7-year rule states that gifts made by an individual more than 7 years before their death are exempt from Inheritance Tax. If the donor dies within 7 years, the gift may be subject to IHT. The tax is reduced by taper relief if the donor survived more than 3 years.

Does the 7-year rule apply to gifts into trust?

Yes. CLTs (gifts into trust) are also subject to the 7-year rule. If the donor survives 7 years, the CLT drops out of the cumulative total, which may release nil-rate band for the estate. If the donor dies within 7 years, the CLT is recalculated at death rates.

Is there any IHT on a gift made 5 years before death?

If the gift exceeds the available nil-rate band, IHT is charged but reduced by taper relief. For a gift made 5 to 6 years before death, only 60% of the full tax rate is charged. So the effective rate would be 40% × 60% = 24%.

Do small gifts also follow the 7-year rule?

Gifts that are covered by an exemption (such as the £3,000 annual exemption, the £250 small gifts exemption, or the normal expenditure out of income exemption) are exempt outright. The 7-year rule only applies to gifts that are not covered by these specific exemptions.

Sources

Inheritance Tax: gifts — GOV.UK
Inheritance Tax: taper relief — GOV.UK
IHTM14801 – Potentially exempt transfers — HMRC