Gifting and the seven-year rule: how to give money away well

The most effective inheritance tax planning tool ever devised is generosity with a calendar. Here's how lifetime gifting works.

The seven-year rule

Most outright gifts to individuals are "potentially exempt transfers" (PETs). Survive seven years from the date of the gift and it falls out of your estate completely — no IHT, no limit on the amount.

Die within seven years and the gift comes back into the reckoning. Two things happen: the gift uses up your nil rate band first (before the rest of your estate), and if your cumulative gifts exceed the nil rate band, taper relief can reduce the tax on the excess for gifts made 3–7 years before death.

A widely misunderstood point: taper relief reduces the tax, not the value of the gift — so it only helps at all where gifts exceed £325,000. For most families, a gift within seven years simply eats nil rate band that would otherwise have sheltered the estate.

Also worth knowing: you can't give something away and keep using it. Gift your house to your children but carry on living there rent-free and it's a "gift with reservation of benefit" — still in your estate, no matter how many years pass.

The exemptions that work immediately

Some gifts leave your estate on day one, no seven-year wait:

• Annual exemption: £3,000 per tax year, per giver. Unused allowance carries forward one year only — so a couple who haven't gifted recently could move £12,000 out immediately.
• Small gifts: up to £250 per recipient per year, to any number of people (can't be combined with the annual exemption for the same person).
• Wedding gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else.
• Gifts to spouses and charities: exempt without limit.

The underused superpower: gifts from surplus income

Here's the exemption that surprises people. Regular gifts made out of income (not capital), as part of a settled pattern, that leave you able to maintain your normal standard of living, are immediately exempt from IHT — with no upper limit.

A retired couple whose pensions comfortably exceed their spending could give the surplus away every year — funding grandchildren's school fees, topping up children's ISAs or pensions — with every pound leaving the estate instantly. No seven-year clock.

The exemption is claimed by your executors after death, so record-keeping is everything: document your income, your expenditure, and the regular pattern of gifts. A simple annual schedule kept with your papers can save your family a difficult argument with HMRC later.

Give well, not just tax-efficiently

Two grounded points to finish. First, never gift money you might need — care costs in later life are real, and gifts made deliberately to avoid care fees can be unwound by local authorities as "deprivation of assets." Second, the best gifts are often the earliest ones: money given to your children at 30, when it changes their housing or debt position, usually does more good than triple the amount at 60.

This article is for general education only and isn't personal advice. Larger or more structured gifting — including trusts — deserves proper planning. Get in touch if you'd like to talk through what your family could safely give.