Giving money away before you die: the seven year rule

The seven year rule in outline

A gift from one individual to another is a potentially exempt transfer. No inheritance tax is due when it is made, and if the person giving it survives seven years it drops out of their estate completely.

If they die within seven years, the gift becomes chargeable and is brought back into the calculation. It is set against the nil rate band first, in date order, so the earliest gifts use the band before later ones. Only where the cumulative total of gifts in the seven years before death exceeds the nil rate band does tax actually fall due on a gift.

The person who received the gift is primarily liable for any tax on it, which is a point recipients are rarely told about. If they cannot pay, the liability falls back on the estate, reducing what everybody else receives.

Gifts into most trusts work differently. They are chargeable lifetime transfers with an immediate charge at 20% on anything above the nil rate band, so the outline above does not apply to them.

Gifts that are exempt straight away

Several exemptions take a gift outside the seven year rule from the moment it is made.

The annual exemption covers £3,000 of gifts in each tax year. An unused annual exemption can be carried forward for one year only, so a couple who have made no gifts can between them move £12,000 in a single tax year by using the current year and the one before.

The small gifts exemption allows gifts of up to £250 to any number of different people each tax year. It cannot be combined with the annual exemption for the same person, so a £3,000 gift to a child cannot have £250 added to it.

Wedding gifts are exempt up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anybody else. The gift has to be made before the wedding and the wedding has to take place.

Gifts between spouses and civil partners are exempt without limit where both are long-term UK residents, and so are gifts to charities and to qualifying political parties. Maintenance payments to a former spouse, a dependent relative or a child in full-time education are also outside the charge.

Gifts out of surplus income

This is the most valuable exemption and the least used. A gift is exempt immediately, with no upper limit, where it forms part of the giver's normal expenditure, is made out of income, and leaves them with enough income to maintain their usual standard of living.

All three conditions have to be satisfied. Normal expenditure means a settled pattern, so a single payment is hard to bring within it, although a documented intention to make regular payments can establish the pattern from the first one. Out of income means genuinely from income and not from capital or from the proceeds of selling an asset. And the standard of living test looks at whether the giver had to draw on capital to live once the gifts were made.

Grandparents paying school fees, a monthly standing order to an adult child, and regular premiums on a life policy written in trust are the common uses. Because the exemption is claimed by the executors after death, on form IHT403, the burden of proving it falls on people who were not present when the decisions were made. Keeping a simple annual record of income, expenditure and gifts is what turns this from an argument into a claim.

Taper relief and what it does

Taper relief reduces the tax payable on a gift that fails, according to how long the giver survived.

A gift within three years of death is taxed at the full 40%. From then the effective rate falls: 32% between three and four years, 24% between four and five, 16% between five and six, and 8% between six and seven.

The point that catches people is what taper applies to. It reduces the tax on the gift, and it only exists where there is tax on the gift in the first place. Because gifts are set against the nil rate band in date order, a gift that fits inside the band carries no tax at all, so taper has nothing to reduce. Somebody who gave away £200,000 five years before dying gains nothing from taper, because the £200,000 sits inside the £325,000 band; the effect of the gift is to reduce the band available to the rest of the estate.

Taper is therefore only relevant on gifts, or cumulative gifts, above the nil rate band.

Why the order of gifts matters

Gifts are brought back into account in chronological order, earliest first, and each uses the nil rate band before the next.

The consequence is that the last gift made before death is the one most likely to bear tax, and the recipient of that gift is the one most likely to receive a bill. Somebody who gave £300,000 to one child in year one and £100,000 to another in year six, then died, would find that the first gift absorbs most of the band and the second child faces the charge.

Where somebody is planning a series of gifts and wants the exposure spread evenly, this is worth understanding before the first cheque is written. It also explains why a recipient should be told what has been given to other people, which families are often reluctant to do.

Gifts with strings attached

A gift with reservation of benefit is treated as still belonging to the giver, and it stays in the estate no matter how many years pass.

The classic case is giving a house to the children and continuing to live in it. The property remains in the estate for inheritance tax, and it can also be outside the children's protection if they divorce or become insolvent, so the arrangement achieves the worst of both.

The reservation can be removed in two ways. The giver can stop taking the benefit, at which point a seven year clock starts from that date. Or they can pay a full market rent, reviewed regularly and actually paid, which takes the arrangement outside the rules. Rent received is then taxable income in the recipient's hands, so the saving is often smaller than expected.

A genuine shared occupation is treated differently: where somebody gives away a share of a house and continues to live there alongside the person they gave it to, each bearing their share of the running costs, the reservation rules can be avoided.

The pre-owned assets charge

Arrangements designed to escape the reservation rules can run into a separate income tax charge instead.

The pre-owned assets charge applies where somebody continues to enjoy an asset they once owned, or which was bought with money they provided, and the gift with reservation rules do not catch it. The benefit is valued annually and taxed as income at the person's marginal rate, with a small exemption below which no charge arises.

It exists precisely to catch the clever schemes, so the practical lesson is that a plan which looks like it removes an asset from the estate while leaving the use of it in place will usually be caught by one rule or the other.

The records your executors will need

Executors have to report gifts made in the seven years before death, and for the surplus income exemption they have to set out the giver's income and expenditure year by year.

Nobody can do that from bank statements alone once the person has died. A one-page record kept as the gifts are made, showing the date, the amount, who received it, which exemption is being relied on, and for income gifts a note of income and normal expenditure for the year, is what makes the claim straightforward.

Without it, executors either pay tax that was not due or spend a great deal of professional time reconstructing what happened. This is one of the few things in estate planning that costs nothing and saves a substantial amount.

Two further points are worth recording alongside the gifts themselves. The first is which exemption each gift is meant to use, because a gift that could be covered by the annual exemption is treated as using it automatically, and a later gift in the same year then has no allowance left. The second is the value of anything given away that was not cash. A gift of shares, a second property or a valuable item has to be reported at its market value on the date of the gift, and establishing that figure years afterwards is far harder than recording it at the time.

Where somebody has made substantial gifts, it also helps for the will to say how any tax on those gifts is to be borne. The default position leaves the recipient liable, and a will can instead direct that the estate bears it. That is a decision with real consequences for the residuary beneficiaries, so it belongs in the drafting conversation, and the default should not be left to settle it.

Frequently asked questions

How much can I give away each year without tax?

£3,000 in total across all gifts in a tax year is exempt immediately under the annual exemption, and you can carry an unused allowance forward one year only. Separately you can give up to £250 to any number of different people each year under the small gifts exemption, provided you have not used another exemption for that same person. Wedding gifts are exempt up to £5,000 to a child, £2,500 to a grandchild and £1,000 to anybody else.

Does taper relief reduce the value of the gift?

No. Taper relief reduces the tax payable on a failed gift, and it only applies where tax is actually due on that gift. Since gifts are set against the nil rate band in date order, a gift that falls within the £325,000 band carries no tax, so taper has nothing to reduce. It becomes relevant only where gifts in the seven years before death exceed the nil rate band. The rates run 32%, 24%, 16% and 8% across years three to seven.

Can I give my house to my children and carry on living there?

You can, but for inheritance tax it does not work. A gift where you keep a benefit is a gift with reservation and stays in your estate however long you live. You can remove the reservation by paying a full market rent, reviewed regularly and genuinely paid, though the rent is then taxable income for your children. Arrangements built to sidestep this often trigger the pre-owned assets income tax charge instead.

What is the exemption for gifts out of income?

A gift is exempt immediately and without any upper limit if it is part of your normal expenditure, made out of income, and leaves you able to maintain your usual standard of living. All three have to be satisfied. It suits regular payments such as school fees or a monthly standing order to a child. Your executors claim it on form IHT403 after your death, so keep an annual note of income, normal expenditure and the gifts made.

Who pays the tax if I die within seven years of a gift?

The person who received the gift is primarily liable for the tax on it. If they cannot or do not pay, the liability falls back on your estate and reduces what your other beneficiaries receive. Because gifts are set against the nil rate band in date order, the most recent gift is the one most likely to attract tax, so the last person you gave money to is the one most likely to get a bill.

Do gifts to my husband or wife count?

No. Gifts between spouses and civil partners are exempt without limit, provided both are long-term UK residents, and there is no seven year period to survive. Gifts to registered charities and qualifying political parties are also exempt without limit. Payments for the maintenance of a former spouse, a dependent relative or a child in full-time education are outside the charge as well.

Sources & further reading

• GOV.UK: inheritance tax on gifts
• GOV.UK: inheritance tax
• Inheritance Tax Act 1984, section 21: normal expenditure out of income
• Finance Act 1986, section 102: gifts with reservation

This article is general information, not legal advice. The law changes and depends on your circumstances — always take advice on your specific situation before acting. Last reviewed 21 September 2026. AD Solicitors Limited is a recognised body regulated by the SRA (no. 8011228).