The basic principle

Gifts you make during your lifetime can reduce the value of your estate for Inheritance Tax purposes — but only if you survive long enough after making them, and subject to specific rules and exemptions.

The 7-year rule

Most lifetime gifts to individuals (known as "Potentially Exempt Transfers") become entirely free of IHT if you survive at least seven years after making them. If you die within seven years, the gift may be brought back into your estate for IHT calculation purposes, though "taper relief" can reduce the tax rate charged on gifts made three to seven years before death (rather than the full 40% applying immediately at year six, for instance).

Annual exemptions that apply immediately

  • Annual exemption: £3,000 worth of gifts each tax year, immediately outside your estate regardless of when you die (and you can carry forward one unused previous year's allowance).
  • Small gifts exemption: up to £250 per person, to as many people as you like, provided they haven't already received part of your annual exemption.
  • Wedding gifts: larger tax-free amounts for gifts made on the occasion of a wedding or civil partnership, with the exact amount depending on your relationship to the recipient.
  • Gifts from normal income: regular gifts made from surplus income (not capital), that don't affect your normal standard of living, can be immediately exempt with no seven-year wait — but require careful record-keeping to demonstrate this pattern to HMRC later.

A common trap: "gifts with reservation of benefit"

If you give something away but continue to benefit from it — such as gifting your house to your children but continuing to live in it rent-free — HMRC can treat it as still part of your estate regardless of the seven-year rule, unless you pay a full market rent or meet other specific conditions. This is a frequent and costly misunderstanding in DIY estate planning.

Why records matter

Keeping a clear record of gifts made — dates, amounts, and recipients — makes it much easier for your executors to correctly calculate any IHT due, particularly for gifts made from surplus income, which require evidence of the pattern to qualify for exemption.

Key takeaways

  • Gifts to individuals become IHT-free after seven years, with taper relief between years three and seven.
  • Several exemptions (annual, small gifts, wedding, income-based) apply immediately, with no waiting period.
  • Continuing to benefit from a gifted asset can mean it still counts as part of your estate.
  • Keep clear records of gifts to help executors and support any exemption claims.