If you’re thinking about giving away money to reduce a future inheritance tax bill, there is one rule that matters more than anything else. It’s simple, powerful, and makes a huge difference to what your family eventually pays.
It’s called the seven year rule.
This rule is basically the crown jewel of inheritance tax planning. Put simply, you can give away pretty much any amount you like, and if you survive seven years after making that gift, it becomes completely inheritance tax free.
That’s why it’s so popular. But HMRC still pulls in millions every year from what it calls “failed gifts”. These are gifts where the rules weren’t followed properly, meaning the gift ends up dragged back into the estate and taxed anyway.
Let’s break down how it all works.
The Seven Year Rule, in Plain English
You can make gifts of any size. If you live seven years after giving them away, they’re ignored for inheritance tax purposes.
Inheritance tax is normally charged at 40 percent on anything above the standard £325,000 allowance. Most people also get an increased allowance of £500,000 if a main home is left to direct descendants and the estate is under £2 million.
Anything left to a spouse or civil partner is tax-free, and couples can combine allowances, meaning up to £1 million can be passed on without inheritance tax. Gifts to charity and community amateur sports clubs are also exempt.
When you give away money or assets during your lifetime, HMRC calls this a “potentially exempt transfer”. The word “potentially” disappears once you hit the seven-year mark. At that point, the gift becomes fully exempt.
What if you die sooner?
The tax due depends on how long you’ve survived after making the gift.
Here’s the taper relief scale:
- Died within 0 to 3 years: 40 percent
- Between 3 and 4 years: 32 percent
- Between 4 and 5 years: 24 percent
- Between 5 and 6 years: 16 percent
- Between 6 and 7 years: 8 percent
- After 7 years: 0 percent
Note that taper relief reduces the tax on the gift, not the overall size of the estate.
A real-world example
Imagine an unmarried person made three gifts in the ten years before they died:
- £50,000 to a brother nine years before death
- £325,000 to a niece four years before death
- £100,000 to a friend three years and three months before death
Here’s what happens.
- The £50,000 gift falls outside seven years, so no inheritance tax.
- The £325,000 gift is covered by the £325,000 allowance, so also tax-free.
- The £100,000 gift to the friend is taxable because the allowance has already been used.
- Since the donor died between three and four years after making the gift, the tax rate is 32 percent.
- So the friend owes £32,000.
- Since the donor died between three and four years after making the gift, the tax rate is 32 percent.
Anything still inside the estate after that would be taxed at the full 40 percent, because the allowance has been fully used by the earlier gifts.
When Gifts Go Wrong
This is where HMRC collects hundreds of millions every year.
A gift only becomes exempt if:
- You survive long enough
- You fully give it away in substance, not just on paper
People often trip up on point two.
HMRC calls this “gifts with reservation of benefit”. In plain terms: if you still benefit from something you’ve supposedly given away, HMRC will treat it as if you never gave it away at all.
Examples:
- Giving your home to your children but continuing to live in it rent free
- Gifting an expensive painting but keeping it hanging in your own house
- Handing over an asset but still using it exactly as you did before
If you continue to benefit, the gift is pulled back into your estate for inheritance tax.
Acting early helps… but don’t overdo it
A lot of failed gifts simply happen because someone passes away sooner than expected. You can’t control that, but you can plan early.
The tricky bit is balance. You want to reduce inheritance tax, but you also need enough money for your own living costs, lifestyle, and possible future care needs. If you’re unsure what’s safe to give away, getting financial advice is a smart move.
The Bottom Line
The seven year rule is one of the most effective inheritance tax planning tools available. It’s simple in theory but easy to get wrong if you still use or benefit from whatever you’ve “given away”.
If you’re thinking about gifting money or assets and want to make sure it’s structured properly, feel free to reach out. We’ll help you understand what’s genuinely exempt, what isn’t, and how to keep things clean in HMRC’s eyes.
Inheritance tax is complicated enough without accidentally undoing your own planning. Let’s keep it simple. Drop us a note if you have any questions or need guidance on how to approach inheritance tax.
