Understanding the Inheritance Tax 7 Year Rule

Thursday 18 September, 2025

A Guide to Lifetime Gifting and IHT Planning

Inheritance Tax (IHT) remains one of the most misunderstood areas of estate planning, yet it is one that affects thousands of families across the UK each year. For individuals and couples in St Albans and local to our UK-wide offices, understanding how the Inheritance Tax 7 year rule works and how it applies to lifetime gifting is essential when making informed and effective decisions about their estates.

With careful planning and professional advice, it is possible to reduce the amount of tax your loved ones may have to pay after your death, while also enjoying the satisfaction of giving meaningful gifts during your lifetime.

What is Inheritance Tax and Who Pays It?

Inheritance Tax is a tax on the estate that is, the property, money and possessions of someone who has died and on some lifetime transfers.

As of the 2025/26 tax year, IHT is charged at 40% on estates valued above the nil-rate band of £325,000. For married couples and civil partners, this threshold can potentially be doubled to £650,000 if unused allowances are passed between spouses.

In addition, a main residence nil-rate band of £175,000 may be available if the family home is passed to direct descendants such as children or grandchildren. This could potentially increase the tax-free threshold to £500,000 per person, or £1 million for couples.

The 7 Year Rule Explained

The inheritance tax 7 year rule is a vital consideration for those looking to reduce their estate's value through gifting. Under current HMRC rules, any gifts made during a person’s lifetime may be exempt from IHT provided the person making the gift survives for seven years after giving it.

These gifts are classified as “potentially exempt transfers” (PETs). If you survive the full seven years, the gift is no longer considered part of your estate for IHT purposes.

However, if you pass away within that seven-year period, the gift may still be taxed, but the amount of tax due may be reduced on a sliding scale known as “taper relief”.

How Taper Relief Works

Taper relief reduces the amount of IHT payable on gifts made between three and seven years before death. It’s important to note that taper relief only applies if the total value of the gifts exceeds the nil-rate band (£325,000). If the gifts fall below that threshold, no tax is due.

Time Between Gift and Death	Rate of IHT Payable
0 to 3 years	40%
3 to 4 years	32%
4 to 5 years	24%
5 to 6 years	16%
6 to 7 years	8%
7+ years	0%

It’s also important to remember that these percentages are only applied after the nil-rate band has been used up by previous gifts or the value of the estate itself.

Allowances for Tax-Free Gifting

While the 7 year rule covers large gifts, there are several options available that allow individuals to make gifts within their lifetime that are immediately exempt from IHT regardless of when they die.

1. Annual Exemption:

Every individual can give away up to £3,000 per tax year without it being added to the value of their estate. Unused allowance can be carried forward one year, giving a potential £6,000 exemption in some cases.

2. Small Gifts Exemption:

Gifts of up to £250 per person per tax year are exempt, provided the recipient hasn’t also benefited from your annual exemption.

3. Gifts on Marriage or Civil Partnership:

Parents can give up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else on the occasion of a wedding or civil partnership.

4. Regular Gifts from Surplus Income:

If you have income that exceeds your regular living expenses, you may be able to make regular gifts out of that surplus, which are immediately exempt from IHT. These gifts must be consistent, documented, and should not reduce your standard of living.

Gifts with Reservation and the Importance of Genuine Transfers

A common mistake is making a gift but continuing to benefit from it, for example, giving your home to a child but continuing to live in it rent-free. Such arrangements are considered “gifts with reservation of benefit” and will still count towards your estate for IHT purposes.

To avoid this, any transfer must be genuine and without ongoing benefit to the giver. Financial advisers can help structure these arrangements to ensure they meet HMRC guidelines and truly reduce the estate's value for tax purposes.

Planning for Children and Grandchildren

More grandparents and parents are choosing to gift wealth during their lifetime to help younger generations with property purchases, education, or general financial support. While this can be a powerful way to pass on wealth, it is vital to ensure it is done in a way that aligns with tax rules, personal finances, and long-term needs.

Conor McClean, Independent Financial Adviser in St Albans, says:

“Many families are eager to support their children or grandchildren during their lifetimes rather than leaving a large inheritance after death. The 7 year rule, combined with gifting allowances and professional financial advice, allows families to plan sensibly and with confidence.”

How Lonsdale Can Help You with IHT Planning

Navigating the complexities of inheritance tax, the 7 year rule, and lifetime gifting is not something most people feel comfortable doing alone. At Lonsdale, our experienced Independent Financial Advisers are here to help individuals and families make informed, compliant and confident decisions about how to pass on wealth.

We take a tailored approach, looking at your full financial picture, future needs and family circumstances, to build an inheritance strategy that is both tax-efficient and aligned with your values.

Whether you’re considering gifts to children, grandchildren, or charitable organisations, we can help you avoid the common pitfalls and ensure your decisions stand up to HMRC scrutiny.

Let’s Plan Your Legacy – Get in Touch Today

If you’re thinking about how to reduce your inheritance tax liability or would like to explore your options around gifting and the 7 year rule, we encourage you to speak with one of our Independent Financial Advisers in St Albans.

At Lonsdale, we’re here to help you protect your wealth, support your family, and plan for the future with peace of mind.

Please note: The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. This is for information only and does not constitute advice. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.

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