Five quick questions
Is the gift covered by an exemption? If so, the seven-year rule may not apply.
Was it an outright gift to another person? Then it's likely to be a PET.
Have seven years passed since the gift? If so, a PET normally becomes exempt.
Have you kept, or will you keep, any benefit from it? If so, the gift may still count as part of your estate, even after seven years.
Were there any earlier chargeable gifts, such as gifts into trust? If you die within seven years of making a later gift to someone, earlier chargeable transfers may also need to be considered. This can mean looking back as far as 14 years before death.
What is a potentially exempt transfer?
A potentially exempt transfer (PET) is generally an outright gift you make during your lifetime to another person that isn't covered by an exemption. There's normally no inheritance tax to pay when you make it. If you survive seven years after making the gift, it normally becomes exempt. If you die within seven years, the gift may be brought back into the inheritance-tax calculation, subject to the 14-year rule.
PET rules can apply to cash, property, shares and personal possessions. Selling something for less than its value can also involve a gift because the difference may be treated as one.
Not every lifetime gift is a PET. Exemptions are considered first, while gifts involving trusts can follow different rules. See our guides to gifting allowances and exemptions, and to trusts, for detailed treatment.
How does the seven-year rule work?
The clock starts on the day you actually part with the gift. For cash, that's usually when the money leaves your account. For property or shares, it's generally when legal ownership changes hands, which isn't always the day you decided to give.
From there, there are two possible outcomes:
You survive seven years. The PET normally becomes exempt and is left out when working out inheritance tax on your estate.
You die within seven years. The PET is described as having 'failed' and is included, generally at what it was worth when you gave it, not its value at your death.
A failed PET doesn't automatically mean an IHT bill. It's set against the available nil-rate band first, and tax on the gift only arises if it takes your total chargeable gifts above the band.
The seven-year timeline
Time between gift and death
|
Tax rate on any part of the gift above the nil-rate band
|
| Less than 3 years |
40% (no taper relief) |
| 3–4 years |
32% |
| 4–5 years |
24% |
| 5–6 years |
16% |
| 6–7 years |
8% |
| 7 years or more |
None: the PET is normally exempt |
These rates only apply to the part of a gift above the £325,000 nil-rate band. A gift that sits entirely within the band carries no tax, wherever it falls on the timeline. The percentages above are rates of tax on the taxable part of the gift. They are not percentages deducted from the value of the gift.
What happens if you die within seven years of a gift?
Failed gifts are lined up in the order you made them, earliest first. Each one uses up the nil-rate band in turn, and whatever's left then goes towards the rest of your estate.
Gifts don't only carry their own tax risk. They also use up the nil-rate band that would otherwise protect what you leave behind. A generous gift to one person can mean more tax on your estate, and less for everyone else who inherits it.
The residence nil-rate band is £175,000 per person. It can apply when you leave your home to children or other direct descendants, but doesn’t apply to lifetime gifts. Married couples and civil partners may be able to benefit from unused allowances. If a spouse or civil partner hasn’t used all of their nil-rate band, the unused portion can usually be transferred to the other person’s estate, increasing the amount available.
How it might add up: a hypothetical example
This simplified example illustrates the order in which gifts can use the nil-rate band. It isn't a calculation of an individual's inheritance-tax liability. It assumes a £325,000 nil-rate band is available, no transferred band, no other chargeable gifts and that applicable exemptions have already been taken into account. It’s assumed these are the entire assets in the estate.
1. A gift of £200,000 to a child, six and a half years before death. It uses £200,000 of the band, leaving £125,000. There's no tax on this gift because it sits entirely within the available nil-rate band.
2. A second gift of £250,000 to a grandchild, four and a half years before death. The remaining £125,000 of the band covers half of it, so £125,000 is taxable. At 40%, that would be £50,000. But because the gift was made four to five years before death, taper relief brings the rate down to 24%. The tax is £30,000.
3. The estate. The two gifts have used the whole band, so there's none left. Unless other allowances or reliefs apply, the remaining estate is taxed at 40% from the first pound.
If you've also made gifts into trust, different rules may affect the calculation. Trust taxation sits outside the scope of this guide, so specialist advice may be helpful where PETs and trust gifts overlap. See our guide to trusts for more detail.
How does taper relief work?
Taper relief reduces the tax on a failed PET made between three and seven years before death where the nil-rate band has been fully used. The longer you live after making the gift, the lower the rate.
It's tempting to read the timeline as a sliding discount on the gift. It isn't. Taper relief reduces the tax, not the value of the gift, which still uses up the nil-rate band in full. And it only matters if the gift is big enough to be taxed in the first place.
Nor does it help the rest of the estate. In the example above, the grandchild's tax bill fell, but the estate gained nothing.
Three years isn't a safe point either. The bill may be smaller after that, but only at seven years does a PET normally fall away entirely.
When might the seven-year rule not apply?
The rule only works if you've given the asset away completely. For example, if you give your home to your children but carry on living there rent-free, or give away investments but keep receiving the income, it may be treated as a 'gift with reservation of benefit'.
In that case, the asset may still count as part of your estate, however long ago you handed it over. If you stop benefiting during your lifetime, a new seven-year clock generally starts from that point. For how this works with particular assets, see our guide to gifting property, shares, and investments.
Who pays the tax, and what records help?
One point that can come as a surprise is that two separate tax bills may arise. If inheritance tax is charged directly on a failed PET, it is normally paid by the person who received the gift, although the executors can also become liable if it remains unpaid 12 months after the end of the month of death. Separately, the gift may use up some or all of the nil-rate band, increasing the tax due on the remaining estate. That additional tax is normally paid from the estate.
That's worth talking about openly, so the people you give to aren't caught off guard. And if you're an executor, you'll need to report gifts made in the seven years before death, which is far easier when records exist.
Keeping a note of each gift helps your executors later:
- The date of the gift
- What you gave and what it was worth at the time
- Who received it
- Any exemption you're relying on, and why
- Any benefit you retained, and when it ended
Five steps for understanding a PET
Whether you're thinking about making a gift or sorting through someone's affairs after they've died, these five questions are a good place to start. They won't replace advice, but they'll help you see where you stand.
- What was given, and does an exemption cover it? Check when, to whom, and whether all or part of it is exempt.
- Is it a PET? An outright gift to another person usually is. A gift into trust usually isn't.
- What order were the gifts made in? List every non-exempt gift in the relevant seven years, earliest first.
- How far does the nil-rate band stretch? See which gifts it covers, and whether taper relief applies to any tax on the rest.
- Who would pay, and what records exist? Then decide whether it's time for some advice.
Tax is only one consideration when making a substantial gift. Affordability, family circumstances, and the consequences of permanently giving away an asset also matter. Our guide to gifting money to children and grandchildren considers those questions in more detail, while our guide to passing wealth to the next generation looks at the wider family-planning considerations.
Making the seven-year rule part of a wider plan
The seven-year rule rewards time. If you live for seven years after an outright gift, it normally stops counting. If you don't, the gift will count as part of the inheritance-tax calculation, subject to the 14-year rule. The outcome turns on the order of your gifts and how much of the nil-rate band they use, and the person who received a gift may face a bill. Good records and a plan that looks at everything together make that much easier to manage.
Lifetime gifts usually work best as part of a joined-up plan, and our guide to estate planning shows how the pieces fit. If you've made, or are thinking about, substantial, repeated, or complex gifts, our Inheritance Tax Planning and Financial Planning specialists can help you understand how the rules apply to you, working alongside your other advisers. You might also find it useful to read when to seek inheritance-tax planning advice.
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