Legal & Tenure

Gifts, Property and the 7-Year Rule — IHT on Potentially Exempt Transfers

Gifting property or money can reduce your inheritance tax bill, but only if you survive seven years from the date of the gift. This guide explains potentially exempt transfers, taper relief, what counts as a gift and the gift with reservation of benefit trap.

Published: 1 Jan 2026 · Updated: 1 Mar 2026 · 6 min read

The 7-Year Rule — The Most Important IHT Concept for Gifters

If you give away assets during your lifetime and survive for **seven years** after making the gift, the gift falls outside your estate entirely and no inheritance tax is charged on it. These outright gifts to individuals are called **potentially exempt transfers (PETs)**.

The 7-year clock starts on the date the gift is made — not the date of any formal documentation. This makes timing critical: a gift made in January 2026 becomes fully exempt in January 2033, provided the donor is still alive.

What Counts as a Gift?

A gift is any transfer of value where the donor receives nothing (or less than market value) in return. This includes:

Cash given to family members
Property transferred at below market value (the discount is the gift)
Shares, investments or jewellery
Payment of someone else's debt

A gift of a **second property at full market value to a family member** is a PET. A gift of that same property but at £50,000 below market value means the discount element is the PET, and the recipient may also be liable for capital gains tax on any future sale.

Taper Relief — If the Donor Dies Within 7 Years

If the donor dies within seven years of making a PET, IHT becomes chargeable on the gift — but taper relief reduces the rate progressively:

Years between gift and death	IHT rate on gift
Less than 3 years	40%
3 to 4 years	32%
4 to 5 years	24%
5 to 6 years	16%
6 to 7 years	8%
7 or more years	0%

Note: taper relief reduces the **rate**, not the value of the gift. It also only applies where the cumulative value of gifts exceeds the nil rate band (£325,000). Gifts within the NRB are already tax-free.

The Nil Rate Band Allocation Rule

When calculating IHT on death, HMRC looks back **seven years** at all PETs made. These gifts use up the nil rate band in chronological order — earliest gifts first. Only gifts that exhaust the NRB are subject to the tapered IHT charge. This chronological rule means the timing of multiple gifts matters considerably.

The Gift With Reservation of Benefit Trap

A gift with reservation of benefit (GWROB) occurs when the donor gives away an asset but continues to benefit from it. The most common example is a parent who signs their home over to their children but continues to live in it rent-free.

HMRC treats a GWROB as if the gift was never made — the asset remains in the estate for IHT purposes. To avoid this, the donor must either:

1. Move out of the property entirely, or

2. Pay a full commercial rent to the new owner

Even then, there can be income tax consequences for the recipient. GWROB is one of the most common IHT planning mistakes and should always be reviewed by a solicitor.

Annual and Small Gift Exemptions

Not all gifts are PETs. The following are immediately exempt:

**Annual exemption**: £3,000 per person per year (prior year unused allowance can be carried forward once)
**Small gifts**: Up to £250 per recipient per year
**Normal expenditure out of income**: Regular gifts from surplus income (not capital) are exempt without limit if they form a genuine pattern

Use our [Inheritance Tax Calculator](/inheritance-tax-calculator) to see how lifetime gifting can reduce your estate's IHT liability over time.