Gifting Money to Family: The 7-Year Rule and Other IHT-Free Gift Allowances

Giving money away during your lifetime is one of the most straightforward ways to reduce a future Inheritance Tax bill, but the rules around timing and specific allowances are widely misunderstood - including a common myth about when taper relief actually kicks in.

Gifts that are always exempt, regardless of size or timing

• Gifts to a spouse or civil partner - always exempt, regardless of amount (subject to specific rules if one spouse isn’t UK-domiciled).
• Gifts to UK-registered charities - always exempt.

Annual allowances you can use every tax year

• £3,000 annual exemption - you can give away up to £3,000 total each tax year, completely free of IHT considerations regardless of who you die within seven years. If unused, this can be carried forward one year only, giving a maximum of £6,000 in a single year if the previous year’s allowance wasn’t used.
• £250 small gifts exemption - you can give up to £250 to as many individual people as you like each tax year, provided they haven’t also received part of your £3,000 annual exemption.
• Wedding or civil partnership gifts - up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, or £1,000 to anyone else, on the occasion of their wedding or civil partnership.
• Regular gifts from surplus income - gifts that come from your regular income (not capital) and don’t reduce your standard of living can be exempt with no upper limit, provided they’re genuinely regular and documented - this is a valuable but under-used exemption, since it requires good record-keeping to demonstrate to HMRC after your death.

Larger gifts: the seven-year rule

Gifts above these allowances are classed as Potentially Exempt Transfers (PETs). If you survive seven years after making the gift, it falls out of your estate entirely and no IHT is due on it. If you die within seven years, the gift is added back into your estate for IHT calculation purposes.

The common myth about taper relief

A frequently repeated misunderstanding is that ‘taper relief’ reduces the tax owed proportionally from the moment a gift is made. In reality, taper relief only applies between years three and seven, and only reduces the tax owed on the gift, not the value of the gift itself, and only once your cumulative gifts have already exceeded your available nil-rate band:

• 0-3 years before death: full 40% IHT rate applies (no taper relief at all)
• 3-4 years: tax reduced by 20%
• 4-5 years: tax reduced by 40%
• 5-6 years: tax reduced by 60%
• 6-7 years: tax reduced by 80%
• 7+ years: the gift is entirely outside the estate - no tax at all

Who’s actually liable if a gift falls within seven years

A detail that catches many families by surprise: if IHT is due on a gift made within seven years of death, the liability generally falls on the recipient of the gift, not the deceased’s estate - meaning someone who received a gift years earlier can unexpectedly find themselves with an Inheritance Tax bill if the giver dies sooner than expected.

The most common DIY estate planning mistake

Giving away an asset (commonly a house) while continuing to benefit from it - for example, gifting your home to your children but continuing to live in it rent-free - is treated by HMRC as a ‘gift with reservation of benefit’. This means the asset stays in your estate for IHT purposes regardless of who legally owns it, entirely defeating the purpose of the gift. Avoiding this specific trap (which requires either genuinely giving up all benefit from the asset, or paying a market rent if you continue to use it) is essential for anyone considering gifting property during their lifetime.

Practical record-keeping

Keeping a clear, dated record of every gift made - the amount, the date, and which exemption (if any) it falls under - makes life considerably easier for your executor after your death, since HMRC will require this information to correctly calculate any IHT due, and gaps or uncertainty can delay probate.

The bottom line

Lifetime gifting is one of the most effective and accessible ways to reduce a future IHT bill, but understanding exactly when taper relief applies (only years three to seven, and only once your NRB is exceeded), who’s actually liable if you die within seven years, and how to avoid the ‘reservation of benefit’ trap is essential to using it correctly.