The 7-Year Rule UK: How to Gift Money and Avoid Inheritance Tax
Inheritance Tax (IHT) is no longer just a "wealthy person’s problem." In the first ten months of the 2025/26 tax year alone, HMRC collected a staggering £7.1 billion in IHT receipts—already £100 million ahead of the previous year’s record-breaking pace. With the average tax bill per taxable estate now sitting at approximately £212,000, and the main tax-free threshold (£325,000) frozen until 2031, more UK families than ever are being pulled into the 40% tax bracket.
Against this backdrop of rising property values and shifting legislation, including the upcoming inclusion of pensions in taxable estates from April 2027—the 7-year rule remains your most powerful defense. It is the legal "reset button" for your estate, allowing you to pass on your hard-earned wealth tax-free, provided you have the one thing money can't buy: time.
1. What is the 7-Year Rule?
In the UK, most gifts made to individuals during your lifetime are classified as Potentially Exempt Transfers (PETs). This means they are not immediately taxed, but their tax-free status is "potential" because it depends on how long you live after making the gift.
If you live for 7+ years: The gift is fully exempt. It is no longer counted as part of your estate.
If you die within 7 years: The gift is added back into your estate for tax calculations. If your total estate (including the gift) exceeds your tax-free thresholds, IHT may be due.
2. How Taper Relief Works
If you die between three and seven years after making a gift, you don't necessarily pay the full 40% tax rate on the portion above the threshold. Instead, HMRC applies Taper Relief, which gradually reduces the tax rate on the gift itself.
| Years Between Gift and Death | Tax Rate on the Gift | Tax Reduction |
|---|---|---|
| 0 – 3 years | 40% | 0% |
| 3 – 4 years | 32% | 20% |
| 4 – 5 years | 24% | 40% |
| 5 – 6 years | 16% | 60% |
| 6 – 7 years | 8% | 80% |
| 7+ years | 0% | 100% (Fully Exempt) |
Important Note: Taper relief only applies to the tax on the gift itself if it exceeds the £325,000 Nil-Rate Band. It does not reduce the tax on the rest of your estate (like your house or savings), which remains at 40%.
3. The 2026 and 2027 Context
Estate planning in 2026 requires more precision than in previous years due to two major shifts:
Frozen Thresholds: The standard Nil-Rate Band (£325,000) and Residence Nil-Rate Band (£175,000) are frozen until 2031. As property prices and assets grow, more families are being pushed into the IHT net, making the 7-year rule their primary defense.
The "Pension Trap" (April 2027): From April 2027, unused pension pots will be included in your taxable estate. This means your "death estate" could suddenly become much larger. Experts now suggest accelerating gifting today to ensure the 7-year clock starts as early as possible before these rules hit.
4. Gifts That Are Always Tax-Free (No 7-Year Wait)
You don't always have to wait seven years. HMRC allows several "Instant Exemptions" that fall out of your estate immediately:
Annual Exemption: You can give away £3,000 each tax year. You can carry forward one year’s unused allowance (totaling £6,000).
Small Gift Allowance: You can give up to £250 per person to as many people as you want.
Normal Expenditure out of Income: If you have surplus income (after all your living costs), you can make regular gifts of any size. This is a powerful, underused tool for parents helping children with monthly costs.
Wedding Gifts: Parents can give £5,000, grandparents £2,500, and others £1,000 tax-free.
5. The "Gift with Reservation" Trap
The 7-year clock only starts when you stop benefiting from the asset.
A common mistake is "gifting" a house to children but continuing to live in it rent-free. HMRC views this as a Gift with Reservation of Benefit. In this scenario, the 7-year clock never starts, and the full value of the house remains in your estate for tax purposes when you die. To avoid this, you must pay market-rate rent to your children.
6. Managing the Risk: Gift Inter Vivos Insurance
What if you make a large gift but worry about dying before the seven years are up?
You can take out a Gift Inter Vivos life insurance policy. This is a specific type of term insurance designed to decrease in line with the taper relief scale. If you die in year five, the policy pays out exactly the amount needed to cover the IHT bill on that specific gift, protecting your beneficiaries from a surprise tax demand.
Frequently Asked Questions
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No. Gifts between UK-domiciled spouses or civil partners are "exempt transfers," meaning you can give them any amount at any time without triggering the 7-year rule or an IHT bill.
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HMRC doesn't track your gifts automatically. It is up to your executors to prove when a gift was made. Keep a "Gifting Log" (or use the Plouta Digital Vault) to record the date, amount, and recipient of every gift.
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There is ongoing speculation about reforming IHT. If the 7-year rule were extended (e.g., to 10 years), "grandfathering" usually applies, meaning gifts made under the old rules are often protected. This is why starting your gifting sooner rather than later is statistically safer.
Take Control of Your Family's Future
The 7-year rule is a powerful tool, but it requires discipline and early action. With thresholds frozen and the "pension tax" looming in 2027, the best time to start your clock was yesterday. The second best time is today. Book a no obligation call with our partner Inheritance tax adviser today.
Written by
Sanjay Kukar
Inheritance Tax Adviser
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Disclaimer: This article is for educational purposes and does not constitute regulated tax or financial advice. Inheritance Tax rules are highly complex and depend on individual circumstances. Plouta Technologies Ltd is a wellness platform; all advice is provided by our FCA-regulated partnered advisers. The Financial Conduct Authority does not regulate tax advice.