Published: July 2026 | Fact-Checked & Audited By: David Vance, CTA FCA (Chartered Tax Advisor & Accountant)
This guide is fully updated for the 2026/27 UK tax year. All Inheritance Tax (IHT) calculations and allowance thresholds have been audited against official HMRC guidelines.
One of the most popular and accessible ways to reduce your future Inheritance Tax (IHT) liability is to gift assets during your lifetime. However, HMRC enforces strict rules to prevent individuals from giving away their estate on their deathbed to evade tax. Under UK tax rules, lifetime gifts are subject to the 7-year rule. In this comprehensive guide, we explain Potentially Exempt Transfers, annual tax-free gifting exemptions, and how taper relief reduces your tax rate if you survive at least three years after making a gift.
What is a Potentially Exempt Transfer (PET)?
When you give a gift (cash, property, shares, or personal belongings) to another individual during your lifetime, it is classified as a Potentially Exempt Transfer (PET). The gift is not taxed immediately. Instead, its final tax status depends entirely on whether you survive for 7 years from the date the gift was made:
- If you survive for 7 years or more: The gift becomes completely exempt from Inheritance Tax, meaning it is excluded from your estate value upon your death.
- If you pass away within 7 years: The gift is added back into your estate value, and may be subject to a 40% tax charge if the total estate exceeds your available Nil Rate Bands.
Annual Tax-Free Gifting Allowances
HMRC provides several annual exemptions that allow you to make tax-free gifts immediately, bypassing the 7-year rule entirely:
- The Annual Exemption: You can gift up to £3,000 per year to anyone tax-free. If you do not use this allowance, you can carry it forward for one tax year, allowing a married couple to gift up to £12,000 in a single year if neither used their allowance in the previous year.
- The Small Gifts Allowance: You can give unlimited small gifts of up to £250 per person per tax year, provided you haven’t used another exemption on the same recipient.
- Wedding or Civil Partnership Gifts: You can give tax-free gifts to couples getting married, depending on your relationship:
- Up to £5,000 from a parent.
- Up to £2,500 from a grandparent.
- Up to £1,000 from anyone else.
- Gifts from Regular Surplus Income: You can make unlimited gifts of any value, provided they are made from your regular surplus income (not capital), are part of your normal expenditure, and do not impact your standard of living.
How Taper Relief Reduces Gift Tax
If you pass away within 7 years of making a large gift (exceeding your £3,000 annual allowance), it is subject to IHT. However, if you survive for at least 3 years after the gift was made, the tax rate on the gift is reduced using Taper Relief:
| Years Between Gift and Death | Tax Rate Reduction | Effective Tax Rate on Gift |
|---|---|---|
| Under 3 Years | 0% | 40% |
| 3 to 4 Years | 20% | 32% |
| 4 to 5 Years | 40% | 24% |
| 5 to 6 Years | 60% | 16% |
| 6 to 7 Years | 80% | 8% |
| 7 Years or more | 100% (Exempt) | 0% |
David Vance, CTA FCA, recommends: “Taper relief applies only to the tax payable on the gift itself, not to the overall value of the estate. The gift uses up your Nil Rate Band (£325,000) first. If you give away £300,000 and pass away in Year 5, no tax is directly paid on the gift (as it fits within the £325k NRB), so no taper relief applies. However, your remaining estate now only has £25,000 of tax-free allowance left, driving up the tax on your property.”
Topical Cluster Links
To run inheritance tax calculations or check spousal and estate allowances, refer to our other guides:
- Use our Inheritance Tax Calculator to estimate your estate tax.
- Read our guide on Inheritance Tax Allowances: Nil Rate Bands & Spousal Transfers.
- Read our guide on How to Reduce Inheritance Tax: Trusts, Gifts, and Exemptions.
Frequently Asked Questions (FAQs)
1. What is the 7-year rule for inheritance tax?
The 7-year rule states that any non-exempt lifetime gifts to individuals become completely tax-free if you survive 7 years from the date of the gift.
2. Can I carry forward unused annual gifting allowances?
Yes, you can carry forward any unused portion of your £3,000 annual allowance for one tax year only, allowing up to £6,000 per person in a single year.
3. How does taper relief apply to gifts?
Taper relief reduces the tax rate on non-exempt gifts if you pass away between 3 and 7 years after gifting, reducing the tax from 40% down to 8% in Year 6.