The seven year rule for lifetime gifts

A gift from one individual to another is a potentially exempt transfer: no inheritance tax is due when it is made, and it becomes fully exempt if the donor survives seven years. If the donor dies sooner, the gift becomes chargeable, uses up the nil rate band before the estate does, and any tax on the gift itself falls first on the person who received it.

Tax investigation insurance from £108.75 a year (£9.06 a month).Pays up to £100,000 of your accountant's fees if HMRC opens an enquiry. No excess. Buy online in a few minutes.

See my price in 2 questions How the cover works Accountant? Offer cover to your clients or call 01795 841 310

What is a potentially exempt transfer?

Section 3A of the Inheritance Tax Act 1984 (IHTA 1984) defines it. For gifts made on or after 22 March 2006, a potentially exempt transfer is a transfer of value by an individual that would otherwise be chargeable, to the extent that it is a gift to another individual, a gift into a disabled trust, or a gift into a bereaved minor’s trust when an immediate post death interest ends. Section 3A(4) makes it an exempt transfer if made seven years or more before death, and a chargeable transfer otherwise. Until the seventh anniversary, or earlier death, section 3A(5) assumes it will prove exempt, so nothing is reported at the time.

Not every gift is a potentially exempt transfer. HMRC’s Inheritance Tax Manual (IHTM04057) points out that a transfer wholly covered by an exemption is simply exempt. Most gifts into trust are immediately chargeable instead, taxed at 20% above the available nil rate band when made. GOV.UK’s guidance puts it simply: no tax is due on gifts if the donor lives for seven years after giving them, unless the gift is part of a trust.

Which gifts never enter the seven year count?

GOV.UK lists the exemptions that keep gifts out altogether:

gifts to a spouse or civil partner who lives in the UK permanently, and gifts to charities and political parties
the annual exemption of £3,000 a tax year, with any unused part carried forward for one year only
small gifts of up to £250 per person per tax year, if no other allowance is used on that person
wedding or civil partnership gifts of up to £5,000 to a child, £2,500 to a grandchild or great grandchild and £1,000 to anyone else
regular payments made from income that the donor can afford after meeting their usual living costs

Where several gifts are made on different days in one tax year, HMRC applies the annual exemption to the earliest gift first (IHTM14143).

Worried about an HMRC check? Tax investigation insurance pays your accountant’s fees if HMRC opens an enquiry or compliance check. Solar Protect cover pays up to £100,000 with no excess. It never pays tax, interest or penalties.

From £108.75 a year (£9.06 a month) for individuals, £117.57 for sole traders and £207.50 for companies and partnerships, including IPT and the £20 admin fee.

See my price in 2 questions or call 01795 841 310.

★★★★★ Rated 4.9 out of 5 on Trustpilot from over 160 reviews

What happens if the donor dies within seven years?

HMRC sets out the consequences at IHTM14512. The gift becomes a chargeable transfer. It is cumulated with the death estate and with any later lifetime transfers. If, after cumulation with earlier chargeable transfers, it exceeds the nil rate band, tax is charged on the gift in its own right. The nil rate band used is the one in force at the date of death (IHTM14515), which for 2026 to 2027 is £325,000.

Because gifts come before the death, they absorb the nil rate band first, in date order. A gift within the band carries no tax itself, but it reduces the band left for the estate, so the estate pays more. The residence nil rate band cannot be set against lifetime gifts at all.

Where tax is due on a gift made more than three years before death, taper relief reduces it. If the gifted asset has fallen in value by the date of death or an earlier sale, section 131 IHTA 1984 lets the person liable claim to have the tax worked out on the lower value.

Who pays the tax on a failed gift?

Under section 199(1), the people liable for tax on a chargeable lifetime transfer include anyone whose estate was increased by it and anyone in whom the gifted property is vested. Section 199(2) substitutes the donor’s personal representatives for the donor where the transfer was a potentially exempt transfer. HMRC’s manual (IHTM14592) summarises the position: the recipient is liable for tax on a failed gift.

The personal representatives are a backstop. Section 204(8) makes them liable only if no one else is liable, or if the tax is still unpaid twelve months after the end of the month of death. Tax on a failed gift is due six months after the end of the month in which the donor died, under section 226(3A).

In practice, GOV.UK explains that tax arising because of gifts is usually paid out of the estate, because the gifts use the nil rate band and the extra tax falls on the estate. Recipients only face a bill of their own once total gifts in the seven years exceed the nil rate band.

Worked example: HMRC’s own figures

GOV.UK gives this example. Sally, who was not married, died on 1 July 2022. Nine years before her death she gave her brother £50,000. Four years and two months before death she gave her sister £325,000, and three years before death she gave her friend £100,000. Her remaining estate was £400,000.

The gift to her brother is more than seven years old and is ignored.
The gift to her sister uses the whole £325,000 nil rate band, so the sister pays nothing.
The gift to her friend is entirely above the band. GOV.UK shows the friend paying £32,000.
The estate has no band left, so it pays 40% on £400,000, which is £160,000.

Read in the light of IHTM14613, a gift exactly three years before death falls into the three to four year band, which is why the friend’s tax is 80% of the full rate. The example shows how the oldest gift within seven years takes the band and later recipients and the estate bear the tax.

Why might you need to look back 14 years?

Each failed gift is itself cumulated with chargeable transfers in the seven years before it. HMRC notes at IHTM14514 that a gift six years and eleven months before death can require a look at transfers going back 13 years and 11 months. In practice the only transfers caught this way are immediately chargeable ones, such as an earlier gift into a discretionary trust.

Does the seven year rule apply if the donor keeps using the gift?

No. If the donor gives something away but keeps a benefit, such as giving a house to a child and carrying on living there without paying a full market rent, it is a gift with reservation. GOV.UK states that the seven year rule does not apply to gifts with reservation, and the asset is counted in the estate at death. Our page on gifting property to children covers this and the capital gains tax side.

What should donors and executors keep?

GOV.UK asks donors to record what they gave, to whom, its value and the date. Executors report gifts made by the deceased on form IHT403 with the IHT400 account. A gift of an asset other than cash is also a disposal for capital gains tax at market value, which is covered in gifts and market value.

What mistakes come up most often?

Treating a gift into a family trust as a potentially exempt transfer. Most trust gifts are immediately chargeable.
Assuming the recipient always pays. Usually the estate bears the extra tax, which changes what the residuary beneficiaries receive.
Expecting taper relief to help a gift that falls within the nil rate band.
Not keeping records, leaving executors to reconstruct seven years or more of bank statements.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.