Gifts and Inheritance Tax Planning UK 2026

The Seven-Year Rule Explained

The seven-year rule (formally known as the seven-year potentially exempt transfer (PET) rule) is the foundation of IHT gift planning. Any gift you make to an individual (not a trust, generally) is a Potentially Exempt Transfer (PET). If you survive for seven years after making the gift, it falls completely outside your estate for IHT purposes. If you die within seven years, the gift is added back to your estate for IHT calculation. Taper relief reduces the IHT payable on gifts made 3–7 years before death, but only on amounts above the £325,000 nil-rate band. The taper rates: 3–4 years (20% reduction), 4–5 years (40%), 5–6 years (60%), 6–7 years (80%). Gifts within 3 years of death get no taper and are taxed at full 40%. Importantly, taper relief reduces the tax rate on the gift, not the value of the gift. The nil-rate band is applied to gifts made first — gifts within 7 years of death use up the £325,000 nil-rate band before the rest of the estate. This means the first £325,000 of gifts in the 7 years before death are tax-free (using the NRB). Planning tip: keep records of all gifts with dates and values, as HMRC may require this information when processing an estate. Make a will and keep it updated to reflect your gifting strategy.

Annual Gift Allowance

Each tax year you have an annual gift exemption of £3,000. This is the most straightforward IHT exemption — you can give away £3,000 per year (in total, not per person) with no IHT implications, regardless of how long you live after making the gift. If you do not use the full £3,000 exemption in one tax year, you can carry it forward to the next year (one year only). This means you can give up to £6,000 in a single tax year if you did not use the previous year's allowance. The annual exemption resets on 6 April each year. Married couples and civil partners each have their own £3,000 exemption, giving a combined £6,000 per year, or up to £12,000 in a year when both carry forward unused allowances. The annual exemption is use it or lose it — you cannot accumulate unused exemptions beyond one year. This makes regular annual gifting a simple but effective IHT reduction strategy. Over 20 years, a couple using their full £6,000 combined annual exemption could remove £120,000 from their estate entirely tax-free, plus any growth on that money. Combine this with the £250 small gifts allowance (see below) for additional tax-free giving capacity.

Gifts from Surplus Income

One of the most generous but underused IHT exemptions is the normal expenditure out of income exemption. You can make regular gifts from your surplus income (after tax and normal living expenses) that are immediately outside your estate with no limit and no seven-year waiting period. To qualify: the gifts must be made regularly (monthly, quarterly, or annually, not ad-hoc), come from income not capital, and not reduce your standard of living. You must maintain enough income for your normal lifestyle after making the gifts. Common examples: regular payments to children for school fees, monthly contributions to a child's JISA or savings account, or regular gifts to elderly parents. The key is keeping records — HMRC will look for evidence that gifts were from income and made regularly. You should document: source of income (pay slips, pension statements), the gifts (bank statements showing regular transfers), and a reasonable living expenses budget showing surplus income. There is no monetary limit on this exemption — a higher-rate taxpayer with significant surplus income could gift tens of thousands per year entirely IHT-free. This exemption is particularly useful for grandparents making regular contributions to grandchildren's JISAs or school fees. See our income tax guide for understanding how different income types are taxed.

Potentially Exempt Transfers

A Potentially Exempt Transfer (PET) is a gift to an individual (or a trust for disabled persons or bereaved minors) that is not covered by another exemption. PETs have no immediate IHT consequences — they become fully exempt if you survive seven years from the date of the gift. PETs are the default category for most significant lifetime gifts: giving money to children for a house deposit, gifting shares to a family member, or transferring a property (other than your main home typically). The value of the PET is its market value at the time of the gift. If you die within seven years, the PET is added back to your estate and uses up your nil-rate band first, potentially pushing the rest of your estate into the 40% IHT bracket. PETs made within 3 years of death receive no taper relief. PETs made 3–7 years before death qualify for taper relief as described above. Interestingly, PETs are not included in the estate for probate purposes — they are declared to HMRC separately on the IHT400 form after death. If you are considering large gifts, maintain a surplus of liquid assets outside the gift to handle any potential IHT that may arise if you die within seven years. Consider life insurance written in trust to cover the potential IHT on gifts — a seven-year decreasing term policy is a common solution.

Gifts to Charities and Political Parties

Gifts to UK charities are completely exempt from IHT, with no limit and no seven-year rule. You can give any amount to a registered UK charity, and it falls immediately outside your estate. Additionally, if you leave at least 10% of your net estate to charity in your will, the IHT rate on your entire estate reduces from 40% to 36%. This is known as the reduced rate of IHT. For estates where charitable giving aligns with your values, this can be very tax-efficient. Gifts to UK political parties are also exempt from IHT if the party has at least two MPs or one MP and received at least 150,000 votes at the last general election. Gifts for national purposes — to institutions like the British Museum, National Trust, universities, and local authorities — are also exempt. Charitable gifts can be made during lifetime or through a will. If you are considering a charitable legacy, use the charitable legacy declaration in your will, specifying the exact charity name and registered number. Charities have Gift Aid on lifetime gifts (the charity can reclaim basic-rate tax on donations), but this is separate from IHT treatment. Remember to keep receipts for all charitable donations in case HMRC queries them on your estate.

Keeping Records for HMRC

Proper record-keeping is essential for IHT gift planning. When you die, your executors must report all gifts made in the seven years before death to HMRC on form IHT400 (or IHT403 for gifts). Without proper records, executors may struggle to identify gifts, potentially overpaying IHT or facing HMRC penalties. Keep a gifting log with: date of each gift, value, recipient, exemption claimed (annual exemption, normal expenditure, small gifts, PET), and supporting evidence (bank statement, letter, receipt). For the normal expenditure out of income exemption, maintain: income records (pay slips, pension statements), a living expenses budget showing surplus, and evidence of regular gift payments. The £250 small gifts allowance allows you to give any number of gifts of up to £250 per person per year, provided they are not covered by another exemption. This is useful for birthday and Christmas gifts. After death, executors have 12 months to submit the IHT account and pay any IHT due. Penalties apply for late filing. HMRC can request additional information about gifts made up to 7 years before death. For complex estates, professional advice from an IHT-specialist solicitor or accountant is strongly recommended. See our self-assessment guide for related tax return requirements during life.

FAQs

How much can I gift each year without IHT implications?

You can gift £3,000 per year under the annual exemption. If you did not use it last year, you can gift £6,000. You can also give unlimited regular gifts from surplus income, unlimited gifts of £250 per person, and unlimited gifts to charities and political parties.

What is the seven-year rule for gifts?

Gifts to individuals are Potentially Exempt Transfers (PETs). If you survive 7 years after making the gift, it falls outside your estate for IHT. If you die within 7 years, the gift is added back to your estate, but taper relief may reduce the IHT on gifts made 3–7 years before death.

Do I need to tell HMRC about gifts I make?

During your lifetime, you generally do not need to report gifts unless you are filling in a self-assessment return and have made large gifts (over £250,000 in the past 7 years). However, keep detailed records — your executors will need to report gifts made in the 7 years before death to HMRC.