UK inheritance tax catches more ordinary families every year: the nil-rate band has been frozen at £325,000 since 2009 (extended to April 2030 by the Autumn Budget 2024) while house prices have soared, dragging middle-class estates into a 40% tax once reserved for the wealthy. Gifting during your lifetime is the most powerful legal way to shrink a taxable estate — but the rules are full of traps. The famous “7-year rule” is widely misunderstood, taper relief disappoints people who do not read the fine print, and some gifts are instantly exempt while others linger in HMRC’s sights for years. This guide lays out the current 2026/27 rules with worked examples.
The 7-Year Rule: Potentially Exempt Transfers (PETs)
Most lifetime gifts to individuals are Potentially Exempt Transfers (PETs). The rule is simple at the edges:
- Survive 7+ years after the gift: it falls out of your estate entirely. No tax, no questions.
- Die within 7 years: the gift is added back into your estate when inheritance tax is calculated.
The 7-year clock starts on the date of the gift. There is no limit on the size of a PET — you can give away £500,000 and it is fully exempt if you live seven years. The risk is entirely about timing, which is why the single best IHT strategy is brutally simple: give early.
What Actually Happens If You Die Within 7 Years
This is the part almost everyone gets wrong. Gifts made within 7 years of death are set against your £325,000 nil-rate band first, in date order (oldest first). If your total gifts in those 7 years are less than £325,000, they use up nil-rate band but no tax is charged on the gifts themselves — the cost falls on your estate, which now has less nil-rate band left.
Example: you give your son £100,000 in 2024 and die in 2026 with a £400,000 estate. The £100,000 gift uses £100,000 of your nil-rate band, leaving £225,000. Your estate (£400,000) minus remaining nil-rate band (£225,000) = £175,000 taxable at 40% = £70,000 IHT. Without the gift, the estate (£500,000 including the £100k) minus £325,000 = £175,000 taxable = the same £70,000. The gift itself attracted no extra tax — but it did not save any either, because you did not survive 7 years.
Taper Relief: Why It Disappoints
Taper relief reduces the tax on the gift — not the gift’s value — and only where cumulative gifts exceed the nil-rate band:
- Death within 3 years of gift: 40% (no relief)
- 3–4 years: 32%
- 4–5 years: 24%
- 5–6 years: 16%
- 6–7 years: 8%
- 7+ years: 0%
The common mistake: assuming a £200,000 gift made 5 years before death is taxed at only 16%. It is not — if total gifts stayed under £325,000, there was no tax on the gift to taper in the first place. Taper relief only matters for large gifts that breach the nil-rate band, and even then it tapers the rate, applied to the excess. Get professional advice before relying on it.
Gifts That Are Always Exempt (No 7-Year Wait)
These sit completely outside the 7-year rule. Use them and the money leaves your estate immediately:
- Annual exemption: £3,000 per tax year, per giver. Unused allowance carries forward one year only — so if you gave nothing last year, you can give £6,000 this year. A couple who have both carried forward can move £12,000 between them in a single year (some calculations put it at £24,000 across two years of doubled allowances — check your own history).
- Small gifts: £250 per recipient per year, to as many people as you like. You cannot combine it with the annual exemption for the same person — it is one or the other per recipient.
- Wedding gifts: £5,000 to your child, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else. Must be given before the ceremony — timing matters.
- Spouse/civil partner: unlimited (if both UK-domiciled; capped at £325,000 otherwise). Charities: unlimited — and leaving 10%+ of your estate to charity cuts the IHT rate on the rest from 40% to 36%.
- Normal expenditure out of income: regular gifts from surplus income (not capital) — school fees for grandchildren, an adult child’s rent, annual family holidays — are fully exempt with no monetary cap, provided they form a normal pattern and you can afford them from income after maintaining your usual standard of living. This is the most underused exemption in the system. Document the pattern: standing orders and a simple annual note of income vs. expenditure.
- Maintenance gifts: for dependent relatives, with no set limit.
The Nil-Rate Bands in 2026/27
- Standard nil-rate band: £325,000 per person, frozen until April 2030.
- Residence nil-rate band: £175,000 extra when a qualifying home passes to direct descendants (children, stepchildren, grandchildren). Tapers away if the estate exceeds £2 million.
- Combined: £500,000 per person, or £1 million per married couple (unused bands transfer to the surviving spouse).
Worked example: you own a £400,000 home left to your daughter, plus £150,000 in savings. Estate £550,000. Nil-rate band £325,000 + residence band £175,000 = £500,000 tax-free. Taxable: £50,000 × 40% = £20,000 IHT.
The Gift-With-Reservation Trap
Give away your house but keep living in it rent-free, and HMRC’s gift with reservation of benefit rules keep the entire property in your estate — forever, regardless of the 7-year clock. The same applies to giving away art you keep hanging on your wall or a car you keep driving. For a gift to be a PET, you must genuinely give up all benefit and enjoyment of it. Schemes that try to dodge this (contrived leases, “careful” arrangements) are exactly what HMRC challenges. If you want to give away the family home and stay, take proper legal advice — this is not DIY territory.
Other 2026 Changes to Know
- Business and Agricultural Property Relief: from April 2026, a £1 million combined cap applies; above it, relief drops from 100% to 50%. AIM shares relief falls from 100% to 50%. Family business owners need fresh valuations.
- Pensions and IHT: from April 2027, most pension pots will fall inside the IHT net — reversing decades of pensions as an IHT shelter. If your estate planning assumed pensions pass tax-free, revisit it this year.
Record-Keeping: Boring but Essential
You do not declare gifts to HMRC when you make them — but your executors must disclose all gifts from the 7 years before death on the IHT return (usually form IHT400). Keep a simple lifetime gift log: date, recipient, amount, which exemption you relied on. For normal-expenditure gifts, keep annual income/expenditure summaries proving the surplus. Your family will bless you for it during probate.
Gifting Assets: The Capital Gains Wrinkle
Cash is clean, but gifting assets — shares, a second property, land — triggers a second tax. For Capital Gains Tax purposes, giving an asset counts as selling it at market value, so if your shares have doubled, the gain is taxable in the year of the gift (above your annual CGT allowance). The recipient then inherits your original cost base for their own future sale.
Two reliefs soften this: holdover relief lets you defer the gain on gifts of business assets and agricultural property (the recipient pays it when they eventually sell), and gifts to a spouse are entirely CGT-free (though the IHT 7-year clock still matters for non-spouses). For large asset gifts, model CGT and IHT together — optimizing one while ignoring the other is a classic expensive mistake.
Trusts in Thirty Seconds
When outright gifts feel too blunt — young beneficiaries, vulnerable relatives, or control concerns — trusts help. A bare trust is simple: the beneficiary owns the assets absolutely from 18, and for IHT it is a PET like any gift. A discretionary trust gives trustees control over who gets what and when, but gifts into it are usually chargeable lifetime transfers — immediately subject to 20% IHT above the nil-rate band, plus 10-yearly and exit charges. Discretionary trusts suit control; bare trusts suit simplicity. Both need proper deeds and advice.
Deeds of Variation: Rewriting the Will After Death
Here is a little-known tool: within two years of someone’s death, beneficiaries can sign a deed of variation to redirect their inheritance — to children, to charity, into trust — and for IHT (and CGT) it is treated as if the deceased had written it that way. Families use this when the will turns out to be tax-inefficient: for example, redirecting assets to use a surviving spouse’s allowances, or carving out the 10% charitable gift that drops the IHT rate to 36%. All affected beneficiaries must agree, and it needs proper drafting — but it is a genuine second chance to get the tax position right.
Frequently Asked Questions
Can I give my daughter £20,000 tax-free?
Almost certainly yes. If your total gifts in the 7 years before death stay within the £325,000 nil-rate band, no IHT arises on the gift regardless of timing. Only estates (plus recent gifts) above the thresholds face tax — and surviving 7 years removes even that.
Do recipients pay tax on gifts?
No. There is no UK tax on receiving a gift. Any IHT question rests with the giver’s estate, not the recipient. (Capital gains tax can apply if you gift an asset that has risen in value — e.g., shares or a second property — since giving counts as a disposal. Cash gifts have no CGT issue.)
Is the £3,000 annual exemption per person I give to?
No — it is per giver, not per recipient. You have one £3,000 allowance to split however you like. Each taxpayer has their own, so a couple has £6,000 a year between them.
What if I need the money back later?
Then it was not a real gift. Loans are not gifts — document them as loans with repayment terms. And never gift money you might need for care costs: local authorities can treat deliberate deprivation of assets as grounds to refuse care funding.
Should I just give everything away now?
No. Keep enough for your own security first — including a potential decade of care costs. The right sequence: secure your own future, use the annual exemptions routinely, make larger PETs early while you are healthy, and document everything. IHT planning that impoverishes the giver is bad planning.
The Bottom Line
The hierarchy of UK gift planning is simple: use the annual £3,000 (plus £250 small gifts and wedding allowances) every year without fail; make larger gifts as early as possible to start the 7-year clock; document normal-expenditure gifts from surplus income; and never retain benefit from something you have “given away.” With the nil-rate band frozen until 2030 and pensions entering the IHT net in 2027, more families will be caught each year — which makes starting the clock now, not later, the highest-value move. For gifts this size, professional advice pays for itself; for the annual-exemption routine, a spreadsheet and discipline are all you need. And remember the other side of the ledger: ISAs remain outside income tax but inside your estate for IHT — see how many ISAs you can have for the full picture.
