Lifetime gifts and the seven-year rule

Gifts made during your lifetime can significantly reduce an eventual IHT bill, but the rules around them are less generous than folklore suggests.

Gifts that are immediately outside the estate

• Annual exemption: £3,000 per person per year (plus one year of unused allowance).
• Small gifts: up to £250 to any number of different people each year.
• Wedding gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else.
• Regular gifts out of income: any amount, provided they are habitual, come out of surplus income and don't reduce your standard of living. This is one of the most powerful exemptions and one of the most under-used — but the paperwork matters.
• Gifts between spouses / civil partners: unlimited.
• Gifts to UK charities and political parties: unlimited.

Potentially Exempt Transfers (PETs)

Any other lifetime gift is a PET. If you survive seven years from the date of the gift, it falls entirely out of your estate. If you die within seven years, the gift uses up your nil-rate band first, and if it exceeds it, IHT is due on the excess.

Taper relief

Taper relief reduces the tax payable on gifts that fall between three and seven years before death — not the gift itself. Sliding scale:

• 0–3 years: no reduction.
• 3–4 years: 20% reduction.
• 4–5 years: 40%.
• 5–6 years: 60%.
• 6–7 years: 80%.

Because taper only bites once a gift exceeds the nil-rate band, its practical benefit is usually smaller than families expect.

Gifts with reservation

If you give something away but continue to benefit from it — the classic example being giving your house to your children while continuing to live in it rent-free — it's still counted as yours for IHT. This is heavily anti-avoidance territory; get advice before trying anything imaginative.