The 7-Year Gifting Rule: How Gifts Are Taxed After Death

Quick Summary: The 7-Year Rule

• Gifts made more than 7 years before death are usually free from inheritance tax
• Gifts made within 7 years of death may be taxable if the estate exceeds the IHT threshold
• Taper relief reduces the tax on gifts made 3-7 years before death
• Some gifts are always exempt regardless of when they were made
• The £3,000 annual exemption and other allowances can reduce taxable gifts

How the 7-Year Rule Works

The 7-year rule applies to "potentially exempt transfers" (PETs) - gifts that become exempt from inheritance tax if the person who made them survives for 7 years.

If the Person Survives 7 Years

The gift becomes fully exempt from inheritance tax. It doesn't count towards the estate value and the recipient keeps the full amount.

If the Person Dies Within 7 Years

The gift is added back to the estate for inheritance tax purposes. Tax may be due depending on:

• The total value of gifts made in the 7 years before death
• The value of the estate
• Whether exemptions and allowances apply
• How long ago the gift was made (taper relief may apply)

Taper Relief: Reduced Tax for Older Gifts

If a gift was made between 3 and 7 years before death, taper relief reduces the inheritance tax payable. The relief works as follows:

Gifts That Are Always Exempt

Some gifts are completely exempt from inheritance tax, regardless of when they were made:

Spouse or Civil Partner

Gifts to a spouse or civil partner are always exempt, with no limit on value. The recipient must be UK-domiciled, or the exemption is limited to £325,000.

Charities and Political Parties

Gifts to UK-registered charities and qualifying political parties are fully exempt.

Annual Exemption (£3,000)

Each person can give away up to £3,000 per tax year without it counting towards IHT. Unused allowance from the previous year can be carried forward (maximum £6,000 in one year).

Small Gifts (£250)

Gifts of up to £250 per recipient per year are exempt. You can give to as many people as you like, but not to anyone who has already received part of your £3,000 annual exemption.

Wedding or Civil Partnership Gifts

• Parents: Up to £5,000
• Grandparents: Up to £2,500
• Anyone else: Up to £1,000

Regular Gifts from Income

Gifts made from surplus income (not capital) are exempt if they form part of a regular pattern and don't affect the giver's standard of living. This is one of the most valuable exemptions but requires good record-keeping to prove.

Maintenance Payments

Payments for the maintenance of a spouse, ex-spouse, dependent relative, or child in full-time education are exempt.

For Executors: Finding and Valuing Gifts

As an executor, you must identify all gifts made by the deceased in the 7 years before death. This can be challenging:

Where to Look for Evidence of Gifts

• Bank statements showing large withdrawals or transfers
• Building society records
• Investment account statements
• Property transfer records at Land Registry
• Letters or notes from the deceased
• Conversations with family members
• Solicitor files if the deceased used legal advice

What Counts as a Gift

• Cash transfers to family or friends
• Property transfers (even if at undervalue)
• Paying off someone else's debt
• Selling assets below market value
• Adding someone to a property title
• Setting up trusts (different rules apply)

Gifts with Reservation

If the deceased continued to benefit from a gift (e.g., gave away their house but continued living there rent-free), it's treated as still being part of their estate. The 7-year rule doesn't apply to these "gifts with reservation of benefit".

Calculating IHT on Gifts: An Example

Scenario: Sarah died in November 2025. She made the following gifts:

• March 2019 (6.5 years before death): £150,000 to her daughter
• January 2023 (2.5 years before death): £100,000 to her son
• Her estate at death is valued at £200,000

Calculation:

1. The gift in March 2019 falls within the 7-year period
2. Total chargeable gifts: £150,000 + £100,000 = £250,000
3. Add estate value: £250,000 + £200,000 = £450,000 total taxable value
4. Nil-rate band: £325,000
5. Amount subject to IHT: £125,000

Applying taper relief:

• The March 2019 gift (6.5 years) gets 80% taper relief - tax at 8% instead of 40%
• The January 2023 gift (2.5 years) gets no taper relief - tax at 40%

What Might Change: Budget 2025 Speculation

There has been significant speculation about potential changes to gifting rules in the November 2025 Budget. None of these are confirmed:

1. Extension to 10-Year Rule

The 7-year period could be extended to 10 years. This would mean gifts must be made a decade before death to become fully exempt. Impact: More gifts would be caught by IHT, particularly affecting older people who made gifts thinking they were safe after 7 years.

2. Lifetime Cap on Tax-Free Gifts

A new limit on the total amount that can be given away tax-free during a lifetime (rumoured at £50,000-£100,000). This would fundamentally change how inheritance tax works, moving from a time-based system to an amount-based cap.

3. Removal of Taper Relief

Taper relief could be removed, meaning any gift within the qualifying period (7 or 10 years) would be taxed at the full 40% rate. This would create a harsh "cliff edge" rather than the gradual reduction under current rules.

What Bereaved Families Should Do

If You're an Executor

1. Search thoroughly for evidence of gifts made in the 7 years before death
2. Check bank statements for large transfers or withdrawals
3. Ask family members if they received any gifts
4. Apply exemptions - £3,000 annual allowance, small gifts, wedding gifts
5. Calculate taper relief for gifts made 3-7 years before death
6. Report on IHT forms - all gifts must be declared, even if exempt

If You Received a Gift

1. Keep records of when the gift was made and its value
2. Understand your liability - you may need to pay IHT on the gift
3. Cooperate with the executor who needs this information

Key Takeaways

• Gifts made more than 7 years before death are generally exempt from IHT
• Gifts within 7 years may be taxable, with taper relief for gifts made 3-7 years before death
• Many gifts are always exempt: spouse transfers, charity gifts, annual allowances
• Executors must identify and report all gifts on IHT forms
• The recipient of a gift is usually responsible for paying any IHT due
• Budget speculation suggests possible changes, but nothing is confirmed
• Keep good records of any gifts made or received

Understanding the 7-year rule is essential for executors dealing with an estate. If the deceased made significant gifts, consider seeking professional advice to ensure correct reporting and tax calculation.