Gifts and Potentially Exempt Transfers: The Seven-Year Rule Explained

The Most Accessible IHT Planning Strategy

Of all the inheritance tax planning tools available under UK law, lifetime gifting is simultaneously the most accessible and the most underused. No specialist trust structure is required. No offshore planning is needed. No business or agricultural assets are involved. Simply giving assets away — to individuals, to families, to charities — during your lifetime can progressively reduce the value of your estate and the IHT that will eventually arise on it.

The "seven-year rule" is the cornerstone of this approach. Understanding how it works — along with the important details of taper relief, exempt transfers, and chargeable lifetime transfers — is essential for any HNW individual engaged in estate planning.

This guide covers the seven-year rule in full, the different categories of gift and their IHT treatment, and the practical strategies for a systematic lifetime gifting programme. All figures and rules are as of the 2025/26 and 2026/27 tax years.

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What Is a Potentially Exempt Transfer?

A potentially exempt transfer (PET) is a gift by an individual to another individual (or to certain trusts for the benefit of disabled persons) that is:

• Made during the donor's lifetime (not on death)
• Not subject to an immediately chargeable IHT charge at the date of the gift
• "Potentially exempt" — it will be fully exempt from IHT if the donor survives seven years from the date of the gift

PETs are the basic mechanism of lifetime gifting for IHT. When you give cash, investments, property, or any other asset to an individual, that gift is a PET. It drops out of the estate calculation immediately (it is no longer in your estate), but HMRC keeps a record of it for seven years. If you die within those seven years, the PET is "failed" — it comes back into the calculation and may be subject to IHT.

Gifts to individuals include: your children, grandchildren, siblings, other relatives, friends, and any private individual. Gifts to companies, most trusts (other than qualifying disabled trusts), and non-qualifying entities are not PETs — they are chargeable lifetime transfers (CLTs) which attract an immediate IHT charge (discussed below).

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The Seven-Year Rule in Practice

If you die within seven years of making a PET, the value of the PET is added back to your estate for IHT purposes. The IHT is calculated on the cumulative value of all failed PETs and your remaining estate, with the nil-rate band applied to the earliest transfers first.

Example:

Sarah gives £600,000 to her daughter Emma in June 2026. Sarah dies in March 2031 — four years and nine months after the gift.

The gift was a PET. Sarah has died within seven years. The PET fails. The £600,000 is added to Sarah's estate for IHT purposes. After applying her nil-rate band (£325,000 in 2026), the remaining £275,000 of the PET is subject to IHT.

But: taper relief applies (see below) because Sarah survived more than three years after the gift.

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Taper Relief: The Seven-Year Sliding Scale

If the donor dies between three and seven years after making a PET, taper relief reduces the IHT chargeable on the failed PET. Taper relief applies to the IHT charge, not to the value of the gift:

Years Between Gift and Death	IHT Rate on Failed PET
0–3 years	40% (full rate)
3–4 years	32%
4–5 years	24%
5–6 years	16%
6–7 years	8%
7+ years	0% (fully exempt)

Taper relief only applies where the chargeable value of the PET exceeds the available nil-rate band. If the PET falls entirely within the nil-rate band, there is no IHT to taper.

Continuing the example:

Sarah's failed PET: £600,000. Less nil-rate band: £325,000. Chargeable excess: £275,000.

Sarah survived 4 years and 9 months — falls in the "4–5 years" bracket. IHT rate: 24%.

IHT on the failed PET: £275,000 × 24% = £66,000.

Had Sarah survived another year (5 years 9 months), the rate would have been 16% — an IHT saving of approximately £22,000 on the failed PET.

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Exempt Transfers: Gifts That Are Immediately Free from IHT

Some transfers are fully exempt from IHT at the date of the gift — they do not need to survive a seven-year period to become exempt. These exemptions are valuable for building a systematic giving programme:

Annual Exemption

Every individual can give up to £3,000 per tax year free of IHT, regardless of the size of their estate. If the annual exemption is not used in one tax year, it can be carried forward to the next — but only one year of carry-forward is allowed.

A married couple therefore has a combined annual exemption of £6,000 (each having their own £3,000). Unused allowances from 2025/26 can be added to 2026/27 — up to £6,000 each or £12,000 combined.

Small Gifts Exemption

Gifts of up to £250 per recipient per tax year are exempt from IHT. There is no limit to the number of recipients. A grandparent with 12 grandchildren could give £3,000 in total under the small gifts exemption alone.

Important: the small gifts exemption cannot be combined with the annual exemption for the same recipient in the same year. You cannot give £250 + £3,000 = £3,250 to one person and claim both exemptions.

Wedding and Civil Partnership Gifts

Gifts made on or shortly before a marriage or civil partnership are exempt:

• £5,000 from each parent of a party
• £2,500 from each grandparent (or a party to the wedding who is the child's ancestor)
• £1,000 from any other person

Gifts to Spouses and Civil Partners

Transfers between spouses and civil partners who are both long-term UK residents (the residence-based test that replaced domicile from 6 April 2025) are fully exempt from IHT, at any time and in any amount. The exemption is unlimited.

Where the recipient spouse is not a long-term UK resident, the exemption is capped at £325,000 (as of 2026/27 — the cap tracks the nil-rate band). Such a spouse can elect to be treated as a long-term UK resident, extending the exemption to the full unlimited amount, but at the cost of bringing their worldwide estate into the UK IHT net.

Gifts to Charity

Gifts to qualifying UK charities are fully exempt from IHT at any time. Leaving 10% or more of the net estate to charity at death reduces the IHT rate on the remainder from 40% to 36%.

Gifts for Family Maintenance

Transfers for the maintenance of a dependent child (under 18 or in full-time education) or a dependent relative are exempt. This covers school fees, university costs, and support for elderly or infirm relatives.

Gifts from Normal Expenditure Out of Income (s.21 IHTA 1984)

One of the most powerful and most underused exemptions. Gifts are fully exempt from IHT if:

1. They form part of the donor's normal expenditure (regular, habitual — not a one-off lump sum)
2. They are made out of income (not out of capital)
3. They leave the donor with sufficient income to maintain their usual standard of living

There is no upper limit to this exemption. A wealthy individual with substantial surplus investment income, pension income, or rental income can give away tens or hundreds of thousands of pounds per year under this exemption, with no IHT consequence, provided the three conditions are met.

Common applications: regular annual gifts to children or grandchildren; life insurance premiums paid into trust (the premium is a regular payment out of income); contributions to a junior ISA or pension for a child or grandchild; regular contributions to a family trust.

Documentation: HMRC requires evidence. Keep a schedule showing income by source, regular expenditure, and the pattern of giving. This schedule can be provided to personal representatives and HMRC after death.

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Chargeable Lifetime Transfers (CLTs)

Gifts into most discretionary trusts (and certain other structures) are not PETs — they are chargeable lifetime transfers (CLTs). A CLT is charged to IHT at the lifetime rate of 20% (half the death rate) on the amount above the available nil-rate band at the time of the transfer.

Example:

A settlor with no prior chargeable transfers settles £500,000 into a discretionary trust in June 2026. The first £325,000 falls within the nil-rate band (no charge). The remaining £175,000 is charged at 20%: £35,000 IHT is due at the time of the transfer.

If the settlor dies within seven years of making the CLT, the CLT is brought back into the estate and the difference between the 20% lifetime rate and the 40% death rate may be recalculated (with taper relief if applicable), resulting in further IHT being due.

CLTs reduce the nil-rate band available for later PETs and for the death estate. The seven-year "cumulation" rule means that only CLTs made in the seven years before a PET (or death) reduce the available nil-rate band.

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The Interaction of CLTs and PETs

The order in which CLTs and PETs are made matters. Best practice is:

• Make PETs first (gifts to individuals) — they use no nil-rate band and generate no immediate charge
• Make CLTs later (gifts to trusts) — if made before PETs, they reduce the nil-rate band available for the PETs

By making PETs first, you preserve the full nil-rate band for trust settlements made later.

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Seven-Year Gifting Programmes in Practice

Regular Annual Gifting

A systematic gifting programme might use:

• £3,000 annual exemption each year (plus carry-forward)
• £250 small gifts to multiple family members
• Gifts from income (documented, regular, from surplus income)
• PETs of larger lump sums (investment portfolios, property)

Over ten to twenty years, a disciplined programme can transfer millions of pounds out of an estate — particularly when combined with investment growth within the gifted assets.

Cascade Gifting

A grandparent gives assets to a parent, who gives (part of) them to a grandchild. Each gift starts its own seven-year clock. If the grandparent survives seven years, the grandparent's PET is fully exempt. If the parent then gives to the grandchild, that starts a new seven-year clock.

Gifting Appreciated Assets

Gifting an asset with an embedded capital gain (for example, shares that have grown significantly in value) triggers a disposal for CGT purposes. The donor pays CGT on the gain at the time of the gift. In exchange, the asset leaves the estate and starts the seven-year PET clock. The trade-off between CGT now and IHT later should be modelled.

Hold-over relief: For gifts into trust (CLTs) and gifts of business property, hold-over relief may be available under s.165 TCGA 1992, deferring the CGT until the recipient disposes of the asset. Hold-over is not available for most PETs to individuals of general investment assets.

Deed of Variation

After a death, the beneficiaries of the estate can redirect their inheritance (or part of it) to other beneficiaries through a deed of variation. If made within two years of death, the variation is treated for IHT purposes as if the deceased had left the assets directly to the ultimate beneficiaries. This is not a PET by the estate — it is a retrospective change to the will. It cannot restart a seven-year clock retrospectively but can redirect assets to more tax-efficient beneficiaries (charities, trusts, etc.).

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Record Keeping for Lifetime Gifts

Personal representatives need accurate records of all lifetime gifts to:

• Calculate IHT on failed PETs and CLTs
• Claim the gifts from income exemption
• Report to HMRC on form IHT400

Donors should maintain a gifts register: date of each gift, recipient, value, nature (cash/asset), exemption relied upon, and evidence of income for the gifts from income exemption. Review and update this annually.

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How Global Investments Can Help

At Global Investments, we help HNW individuals and families build structured lifetime gifting programmes that systematically reduce their IHT exposure while maintaining their financial security.

We can model your IHT liability, design a gifting strategy that integrates with your overall financial plan, ensure the gifts from income exemption is properly documented, and coordinate with trust and legal advisers to implement CLT structures where appropriate.

Contact us to arrange a confidential review of your estate and gifting strategy.

This guide is for general information only and does not constitute tax or legal advice. IHT rules are complex and subject to change. Figures and thresholds shown are for the 2025/26 and 2026/27 tax years. Always seek qualified professional advice before making significant gifts. As of 2026.