Inheritance Tax is a tax that’s charged on the money, property and possessions of someone who has died. The standard Inheritance Tax rate is 40 per cent, but it’s only charged on the part of the estate that’s above £325,000 — which is the current threshold.
HM Revenue & Customs (HMRC) has put regulations, like the seven-year rule, in place to stop people from getting out of having to pay Inheritance Tax by giving away all of their money on their deathbeds.
In this article, we’ll explain what the seven-year rule is, go into Inheritance Tax in more detail and give some examples of gifts that are exempt from Inheritance Tax.
If you make a gift to an individual that isn’t immediately tax-free, it’s known as a “Potentially Exempt Transfer (PET)”, and will only be tax-free if you survive for at least seven years after giving the gift.
If you die within seven years, Inheritance Tax may have to be paid on the gift — but how much depends on how long you survive after you gave it.
Inheritance Tax is paid on death, but it’s important to understand that it can apply to certain gifts that are made before the person dies. Some gifts are tax-free (which we’ll give examples of later), while others can create a tax bill immediately or further down the line.
As already stated, the Inheritance Tax threshold (also known as the “nil-rate band”) is £325,000 for individuals — or £650,000 for married couples or civil partnerships. This is in addition to the residence nil-rate band, which is currently £175,000 per person. The residence nil-rate band is a higher Inheritance Tax threshold that only applies to direct descendants.
Currently, the average inheritance received in the UK is around £70,600, which is well below the £325,000 threshold. But while Inheritance Tax won’t apply to most people right now, rising property prices could mean houses will be pushed over the limit in the future — especially as Inheritance Tax thresholds have been frozen until 2026.
If a benefactor dies within seven years of giving an individual a gift, the Inheritance Tax payable is applied on a sliding scale. This is called “taper relief”.
The rate of Inheritance Tax starts to reduce three years after the gift was made. Here are the tax reduction rates for the seven-year period:
|How long ago the gift was made||Tax reduction|
It's important to remember that taper relief only applies to the tax that a recipient pays on the value of the gift above the £325,000 Inheritance Tax threshold.
If the recipient is left the rest of the estate in the deceased’s will, the full rate of Inheritance Tax will be charged on it — which is usually 40 per cent — as the gift will have used up the whole tax-free allowance.
Inheritance Tax must be paid to HMRC within six months of the benefactor’s death. It’s paid out of the funds from the deceased’s estate and is done by the person dealing with the estate — if there’s a will, this is the “executor”.
Beneficiaries don’t normally pay tax on the things they inherit at the time they inherit them. However, they may have to pay related taxes, such as Income Tax on profit they earn in the future, for example, rental income from a property that’s left to them in a will.
As explained above, individuals given gifts may have to pay Inheritance Tax if they receive more than £325,000 and the benefactor dies within seven years.
If you’ve made a series of gifts over time, or you’ve given gifts to certain types of trusts, Inheritance Tax rules can get even more complicated.
Gifts given to certain trusts create immediate Inheritance Tax bills, so if you are thinking about gifting to a trust, it’s worth speaking to a financial advisor to find out whether there could be any tax to pay in the future.
It’s also worth bearing in mind that a series of gifts made over time could mean Inheritance Tax is payable up to 14 years prior to your death. This is known as the "14-year rule".
In addition to Potentially Exempt Transfers, there are a range of gifts that are exempt from Inheritance Tax if you give them away while you are still alive. Some of these include:
- Gifts between married couples or civil partners — All assets passed to a UK-domiciled spouse or civil partner are exempt from Inheritance Tax. Some gifts given to non-UK domiciled spouses are also free from Inheritance Tax.
- Regular gifts or payments from your normal income — These could be Christmas, birthday and anniversary presents and are Inheritance Tax-free, as long as they’re part of your normal expenditure and made from your income.
- Small gifts of £250 or less — You can make an unlimited number of Inheritance Tax-free gifts of £250 or less. Note that if you’ve already used another exemption to gift someone, you won’t be able to use this one for them too.
- The first £3,000 gifted in each tax year — Every year you can gift up to £3,000 without paying Inheritance Tax and you can even carry over any unused exemption from the previous year.
- Wedding and civil partnership gifts — You can give wedding gifts of up to £5,000 to your child, £2,500 to your grandchild or great-grandchild and £1,000 to anyone else, without paying Inheritance Tax on them.
- Family maintenance gifts — Gifts that help your relatives with living expenses are Inheritance Tax-exempt.
- Gifts to qualifying charities — You can make Inheritance Tax-free gifts of any value to qualifying charities, housing associations and other exempt organisations, like museums, universities and community sports clubs.
- Gifts to political parties — Provided the political party has at least two members elected to the House of Commons, with one of them elected with 150,000 votes in a general election, you can make gifts to the party without paying Inheritance Tax.
Inheritance Tax is a tax that’s charged on the money, property and possessions of someone who has died, but it’s only charged on the part of the estate that’s above £325,000 — which is the current threshold.
To stop people from getting out of having to pay Inheritance Tax by giving away all of their money on their deathbeds, HMRC has put regulations in place, one of which is the seven-year rule.