Here’s What You Ought to Know About the 7-Year Inheritance Tax Rule

UsefulOctober 26, 2025

Inheritance planning isn’t just for the super-wealthy. If you own a home, savings, or any assets worth passing on, this matters to you. The UK’s 7-year rule could help your loved ones keep more of what you give, not hand it over to HMRC.

When you give someone a large gift, it might be free from inheritance tax. But only if you live for seven years after handing it over. That’ is the big catch. If you don’t make it to the seven-year mark, the value of the gift could still be taxed as part of your estate.

These gifts are called ‘Potentially Exempt Transfers,’ or PETs. The word “potentially” matters. If you pass away too soon, HMRC will look at the gift and possibly add its value back to your estate. That might eat into your £325,000 tax-free limit. Go over it, and tax kicks in.

Pixabay / Pexels / If the gift pushes your estate over the limit, someone may need to pay tax on it. Usually, that is the person who got the gift, not the estate.

But your executor has to sort all this out, and it is messy without good records.

How Taper Relief Reduces the Tax Bill

Now, say you don’t quite hit seven years but you last more than three. There is still a win here. A rule called taper relief can cut down the tax owed. It doesn’t shrink the gift, but it trims the tax percentage.

Die within three years? Full 40% tax. Not fun. But if you live a bit longer, the tax rate drops year by year. Between three and four years, it is 32%. Then 24%, 16%, and finally 8% if you make it to six. Cross the seven-year line, and the gift is tax-free.

So, every extra year you live after giving a big gift matters. This is why timing is everything when it comes to inheritance planning. You need a smart plan, not a wing-it approach.

Important Considerations and Future Changes

Some gifts don’t count. If you give away your house but keep living in it for free, that is not a real gift in HMRC’s eyes. It is called a “gift with reservation of benefit.” The value of the house still counts toward your estate. That can create a nasty surprise on the tax bill.

Nilov / Pexels / There is talk of stretching the 7-year rule to ten years. That would mean waiting even longer for gifts to become tax-free. It is not yet the law, but it highlights the importance of staying on top of changes.

What works now might not work in five years. So, check your inheritance plans regularly. Talk to an adviser if you are unsure. A plan that worked ten years ago might need a serious refresh today.

Strategies for Effective Gifting

Want to use the 7-year rule to your advantage? Don’t wait until your later years to start giving. The earlier you start, the better your chances of living long enough for the gift to become tax-free.

Each year, you can also give away £3,000 completely tax-free. That allowance resets every tax year. If you didn’t use it last year, you can roll it over and give £6,000. Small gifts up to £250 per person are also exempt, so spread the love. It adds up.

Ideally, gift from your extra income. If you have money coming in that you don’t need for your usual expenses, you can give it away regularly. These gifts are immediately exempt from inheritance tax, even if you die the next day. But don’t just tell people you gave it, write it down. HMRC loves paper trails.