Giving money to your children while you are alive feels simple. Then someone mentions the 7 year rule inheritance tax applies, and it suddenly sounds like a trap with a ticking clock.
It does not need to be confusing. This guide explains the 7 year rule step by step, with the exact rates from GOV.UK and a worked example you can follow.
Inheritance tax is not a niche worry any more. HMRC's latest receipts bulletin, published on 22 September 2026, shows £3.8 billion collected between April and August 2026, £0.1 billion more than a year earlier.
What is the 7 year rule inheritance tax uses?
Most gifts you make to people are called potentially exempt transfers, or PETs. The word "potentially" matters. A PET becomes fully exempt if you live for 7 years after making it.
If you die within 7 years, the gift is counted back into your estate. That is the whole 7 year rule in one sentence.
Gifts to your spouse or civil partner, and to charities, are exempt whenever you make them. Gifts into most trusts work differently: they can be taxed when made, so trusts and inheritance tax need specialist help.
How does taper relief work?
Taper relief reduces the tax on a gift made between 3 and 7 years before death. Here are the rates from GOV.UK's gift rules:
| Years between gift and death | Tax rate on the gift |
|---|---|
| Less than 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7 or more | 0% |
Source: GOV.UK, Inheritance Tax: gifts, checked October 2026. Our gift rules page keeps these rates with their source.
Now the bit most articles get wrong. Taper relief only applies if your gifts in the 7 years before death add up to more than £325,000. Below that, the gifts simply use up your nil-rate band and there is no tax on the gifts themselves to taper.
Why gifts still matter below £325,000
Even if no tax falls on the gift, it eats into your inheritance tax threshold. Give away £200,000 and die 5 years later, and your estate only has £125,000 of nil-rate band left. The rest of your estate pays more tax as a result.
A worked example of the 7 year rule
Here is an illustrative example, not a real family.
Margaret gives her son £425,000 in cash in June 2022. She has made no other gifts. She dies in December 2026, four and a half years later.
- Her annual exemptions for that tax year and the one before take off £6,000, so the gift counts as £419,000.
- That uses her full £325,000 nil-rate band.
- The remaining £94,000 would be taxed at 40%: £37,600.
- The gift was made 4 to 5 years before death, so the rate is 24% instead: £22,560.
- Her son pays the £22,560, because the gift was above £325,000.
- Her estate has no nil-rate band left, so everything else she owns is taxed at 40%, apart from any residence nil-rate band or exempt gifts.
Had Margaret lived until June 2029, the gift would have been completely outside her estate. That is the 7 year rule inheritance tax relies on: the clock, not the size of the gift, decides the bill.
Which gifts are exempt straight away?
Some inheritance tax gifts never enter the 7 year count at all:
- Annual exemption: £3,000 a tax year in total. You can carry unused allowance forward one year only.
- Small gifts: up to £250 per person each tax year, as long as you have not used another allowance on that person.
- Wedding or civil partnership gifts: up to £5,000 to a child, £2,500 to a grandchild and £1,000 to anyone else.
- Gifts from income: regular gifts from your monthly income are exempt with no limit, as long as you can still afford your normal living costs.
- Spouse, civil partner and charity gifts: exempt with no limit.
Gifts from income are the most powerful and the most misunderstood. They must be regular, from income rather than savings, and leave your standard of living intact. Keep a simple record: date, amount, recipient, and a note of your income and spending that year.
Can I give my house away and keep living in it?
Not if you want it out of your estate. HMRC calls this a gift with reservation of benefit. GOV.UK's own examples include giving your home to a relative but still living there, and giving away a painting but still hanging it on your wall.
If you keep using the thing you gave, HMRC treats it as still yours. To make the gift work, you would need to move out, or pay the new owner a full market rent.
How to avoid inheritance tax traps with gifts
Inheritance tax planning with gifts goes wrong in a few common ways:
- Assuming taper relief applies to everything. It only cuts the tax on gifts above the £325,000 threshold.
- Not keeping records. Your executors must tell HMRC about gifts made in the 7 years before death. Without notes, they are guessing.
- Giving away money you need. Care costs and a long life can make an early gift look rash.
- Mixing up the annual exemption. It is £3,000 per giver, not per child.
- Forgetting April 2027. From 6 April 2027 most unused pensions count towards your estate, which pushes more estates over the threshold. Our guide to the 2027 pension change explains it.
"Rising property values and inflation are quietly turning what was once a tax for the wealthy into a bill for ordinary households."
Amit Joshi, Managing Director of Wealth, Mattioli Woods, September 2026
How to check your own position
Start with a simple list of every gift you have made in the last 7 years, with dates. Then add up your estate: home, savings, investments and, from April 2027, unused pensions.
Our inheritance tax calculator applies the nil-rate band, residence nil-rate band, gifts in date order and taper relief, and shows the rules it used. The nil-rate band rule page shows the £325,000 threshold, which is frozen until April 2031.
Plenence is for education and modelling only. For trusts, business relief or anything involving a will, speak to a solicitor or a regulated adviser for inheritance tax planning advice. If the family home is involved, read our guide to inheritance tax when the second parent dies too.