Short answer: most gifts to people leave your estate for inheritance tax if you live seven more years. If you die within seven years the gift is counted, but the tax on it shrinks after year three. Some gifts are exempt at once: £3,000 a year, small gifts of £250, wedding gifts, and — most useful for people with more income than they spend — regular gifts out of surplus income, with no limit.
The seven-year clock
A gift to a person is a potentially exempt transfer. Nothing happens when you make it. If you are alive seven years later it is forgotten. If you die inside seven years, the gift is added back to your estate, uses your nil-rate band first, and any tax due on the gift itself is reduced by taper relief:
| Years between gift and death | Tax on the gift as a share of the full 40% |
|---|---|
| Under 3 | 100% (40%) |
| 3 to 4 | 80% (32%) |
| 4 to 5 | 60% (24%) |
| 5 to 6 | 40% (16%) |
| 6 to 7 | 20% (8%) |
| 7 or more | none |
Taper relief only reduces tax that is actually due on the gift — gifts inside the £325,000 band pay nothing anyway, so the taper is worth most on large gifts.
Gifts that are exempt immediately
- £3,000 a year, and last year's £3,000 if unused — so up to £6,000 in the first year.
- Small gifts of £250 to any number of people, as long as they had nothing else from you that year.
- Wedding gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone.
- Regular gifts out of surplus income — the exemption that matters most for retirees with a good pension. If you give regularly (say monthly or yearly), from income rather than capital, and it leaves you able to keep your normal standard of living, there is no upper limit and no seven-year wait. Keep records: the executors have to show the pattern.
- Gifts to a spouse or civil partner, to charities and to political parties.
How much is safe to give?
The question the seven-year rule does not answer is whether you can afford it. Money Horizon solves for it: the largest regular gift, and the largest lump gift, that leaves your own plan holding to your horizon — even with a poor first decade of returns — and shows the inheritance tax it saves. For the example household it is £4,000 a year from 65, saving £144,000 of tax. Every gift you log gets its own clock, and the estate chart shows the moment each one drops out.
A worked example
At 68 you give your son £100,000. You die at 72, four and a half years later, with an estate of £900,000 and no other gifts.
- The gift uses £100,000 of your £325,000 band, leaving £225,000 for the estate.
- Tax on the gift itself: none — it sits inside the band.
- The estate pays 40% on £900,000 − £225,000 = £675,000: £270,000.
Had you lived to 75 the gift would be outside the estate, the full £325,000 band would apply to the estate, and the bill would fall to £230,000 — the gift saved £40,000. Had the gift been £500,000, taper relief would cut the tax on the £175,000 above the band from £70,000 to £42,000.
The fourteen-year trap
Gifts into most trusts are chargeable lifetime transfers, not potentially exempt ones. They use the band for seven years too — but a later gift to a person can be caught by a trust gift made up to fourteen years before death, because the earlier gift is still in the reckoning when the later one is tested. Money Horizon tracks both kinds.
Questions people ask
Can I give my house to my children and keep living in it? Not effectively. A gift where you keep the benefit — living rent-free in the house — is a "gift with reservation" and stays in your estate however long you live, unless you pay a full market rent.
Do gifts have to be declared? Not when you make them. Your executors report gifts made in the seven years before death on the inheritance tax return. Keep a dated list; Money Horizon's gift log exports one.
Who pays the tax on a gift if I die within seven years? The person who received it, in the first instance. Many families take out decreasing life cover written in trust to meet it.
Is there a limit on gifts out of income? No fixed limit. The gifts must be regular, made from income (pensions, salary, dividends, interest — not from selling assets), and leave you with enough to live as you normally do.
Does the seven-year rule apply to gifts to my spouse? No — gifts between spouses and civil partners are exempt without limit or waiting.