The rule
A gift to a person is free of inheritance tax once the giver has lived for 7 years after making it. If the giver dies within 7 years, the gift is added back when working out the tax. A gift made exactly 7 years before the death is outside the window.
Gifts that are exempt
Some gifts are exempt straight away and never count (GOV.UK, gifts):
- The annual exemption: £3,000 of gifts each tax year. Any unused part can be carried forward one year only, so up to £6,000 can be covered at once.
- Small gifts: up to £250 to any number of people, as long as the same person hasn’t had another exemption from you that year.
- Wedding or civil partnership gifts: up to £5,000 to a child, £2,500 to a grandchild or £1,000 to anyone else.
- Regular gifts from income that leave you with enough to keep your usual standard of living.
- Gifts to a spouse or civil partner, and to charities, at any time.
The annual exemption is used against gifts in date order, oldest first, and the current year’s £3,000 is used before last year’s.
How gifts use the nil-rate band
Gifts in the 7 years, after their exemptions, use the £325,000 nil-rate band before the estate does, oldest gift first. Gifts never use the residence band. So £200,000 of gifts leaves only £125,000 of nil-rate band for the estate, and the estate pays more tax even though the gifts themselves are within the band.
If the gifts add up to more than the nil-rate band, the part over it is taxed at 40%. That tax is paid by the person who received the gift.
Taper relief
Taper relief cuts the tax on a gift, not the gift’s value, if it was made more than 3 years before the death (IHTM14612):
| Years between gift and death | Share of the tax paid |
|---|---|
| Up to 3 | 100% |
| More than 3, up to 4 | 80% |
| More than 4, up to 5 | 60% |
| More than 5, up to 6 | 40% |
| More than 6, up to 7 | 20% |
Taper relief only helps when there is tax on the gift itself, that is when gifts go over the nil-rate band. It never reduces the tax on the rest of the estate.
Examples
A father gives his son £100,000 on 1 January 2022 and dies on 1 July 2026, leaving a £600,000 estate including a £300,000 home to his children. Two annual exemptions (2021/22 and the year before) take off £6,000, so £94,000 counts. That leaves £231,000 of nil-rate band for the estate. With the full £175,000 residence band, the estate tax is 40% of £194,000: £77,600. The gift itself is within the band, so there’s no tax on it.
Now add a second, older gift: £300,000 on 1 January 2020. Less two annual exemptions, £294,000 counts and uses the nil-rate band first, leaving £31,000. The 2022 gift is £63,000 over the band: 40% is £25,200, and as it was made between 4 and 5 years before the death, taper relief means 60% is paid. The son pays £15,120. The estate has no nil-rate band left, only the £175,000 residence band, so it pays £170,000. The total is £185,120.
Things to watch
- Gifts with reservation. If you keep using something you’ve given away, like living rent-free in a house you gave your children, it still counts as yours.
- Records. Executors need the date, amount and recipient of each gift. Keeping a simple list makes their job far easier.
- Gifts into trusts follow different rules, and can be taxed when they’re made.