Passing wealth to the next generation does not have to wait until death. This article explains how inheritance tax treats gifts made during a lifetime, which gifts are ignored immediately, and how the seven-year rule and taper relief work for the rest.
Why gifts still matter for inheritance tax
Inheritance tax is usually discussed as a charge on an estate at death. But the rules also look backwards. According to GOV.UK, some gifts made during a person’s lifetime may be taxed after their death, and the standard rate is 40%, charged only on the part of an estate above the tax-free threshold. That threshold is £325,000, and it can rise to £500,000 where a home is left to children, grandchildren or other eligible relatives.
The result is a system with two layers: a set of everyday exemptions that remove small and regular gifts from the picture altogether, and a longer-term rule that decides whether larger gifts fall back into the calculation. Families tend to meet the first layer without noticing and the second only when it is too late to change anything.
For wider context on why the timing of family transfers is under such close scrutiny, see how the great wealth transfer is reshaping the advisory industry, and for the reliefs that apply to business and farm property, see what changed in April 2026.
The everyday exemptions that need no seven-year wait
Some gifts are outside the inheritance tax net from the day they are made. GOV.UK sets out the following:
| Exemption | Amount | Key condition |
|---|---|---|
| Annual exemption | £3,000 per tax year | Can go to one person or be split; unused amount carries forward one year only |
| Small gifts | £250 per person per tax year | Unlimited number of recipients; cannot be combined with another allowance for the same person |
| Wedding or civil partnership gift to a child | £5,000 | Can be combined with other allowances except the small gift allowance |
| Wedding gift to a grandchild or great-grandchild | £2,500 | As above |
| Wedding gift to anyone else | £1,000 | As above |
The tax year runs from 6 April to 5 April. Because unused annual exemption can be carried forward only to the following year, a couple who gave nothing last year could, in principle, give more this year under the annual exemption. Whether that suits a particular family is a matter for them and their advisers, not something a general guide can judge.
Can regular gifts from income escape the tax entirely?
Yes, under the rule known as normal expenditure out of income. GOV.UK says there is no limit on how much can be given tax-free under this heading, as long as two conditions are met: the giver can afford the payments after meeting usual living costs, and the gift is paid from regular monthly income.
The examples given include paying a child’s rent, paying into a savings account for a child under 18, and supporting an elderly relative. This exemption can be combined with other allowances, except the small gift allowance.
Two practical points follow from the wording. First, the test is about income, not capital: selling an asset or drawing down savings to fund a gift does not fit the description. Second, the test is about affordability: if the giver has to cut their own standard of living to keep the payments going, the condition is not met.
Keeping the records that make exemptions provable
An exemption is only as useful as the evidence behind it. GOV.UK advises keeping a record of what was given and to whom, the value of each gift, and when it was given. Those records matter because it is typically executors, not the giver, who must demonstrate after a death that a gift qualified.
For regular gifts from income, a sensible record would also show income and expenditure over time, so that the “after usual living costs” test can be evidenced. That is an observation about good practice rather than a GOV.UK requirement, but it follows directly from what the exemption asks to be shown.
How does the seven-year rule work?
Gifts that do not fall within an exemption are, according to GOV.UK, generally tax-free if the giver survives seven years after making them. The exception is a gift into a trust, which follows different rules.
If the giver dies within seven years, the gift may be pulled back into the inheritance tax calculation. The key dates are:
- Died within three years of the gift: the gift is taxed at the full 40% rate.
- Died three to seven years after the gift: taper relief may apply and reduce the rate.
- Died seven or more years after the gift: no inheritance tax on the gift.
Importantly, the gift is not taxed in isolation. GOV.UK states that taper relief applies only if the total value of gifts made in the seven years before death is over the £325,000 threshold. Gifts within that threshold use it up first, which is why the tax-free band is often described as being “used” by earlier gifts before the estate itself is considered.
What taper relief actually reduces
Taper relief is frequently misunderstood. It reduces the rate of tax charged on a gift, not the value of the gift itself. GOV.UK lists the following rates for gifts made three to seven years before death:
| Years between gift and death | Rate of tax on the gift |
|---|---|
| Less than 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7 or more | 0% |
The 40% figure for gifts within three years is the standard rate. Each later band steps down by eight percentage points.
A worked example with round numbers
The following is illustrative arithmetic, simplified to a single gift and ignoring all other gifts, assets and reliefs.
Suppose someone gives £400,000 in cash to an adult child and dies five and a half years later, so the gift falls in the five-to-six-year band.
- The first £325,000 of gifts in the seven years before death falls within the tax-free threshold.
- The remaining £75,000 (£400,000 minus £325,000) is the part exposed to tax.
- At the full 40% rate, the tax would be £30,000.
- At the five-to-six-year taper rate of 16%, the tax on that £75,000 is £12,000 (£75,000 × 0.16).
Had death occurred within three years, the charge would have been £30,000; had it occurred after seven years, nothing. The same gift can therefore produce very different outcomes depending purely on timing. A real calculation would also need to account for any other gifts, the rest of the estate and who bears the tax.
Who pays if tax is due on a gift?
GOV.UK says the estate usually pays. However, where gifts in the seven years before death exceed £325,000, the person who received a gift in that period may be the one who pays the tax on it. This is a point worth discussing openly within a family: a recipient who has spent or invested a gift can face a bill years later for money they no longer hold in cash.
Timing, evidence and the limits of a general rule
The rules reward early, modest and well-documented giving, and penalise large gifts made late. They also sit within a policy environment that moves, as the Autumn Budget pensions and ISA debate shows, and wealthy households often weigh gifting alongside wider structures, a theme explored in why some family offices are scaling back.
Lifetime gifts sit at the intersection of tax rules and family decisions. The exemptions are generous for small and regular giving, the seven-year rule rewards patience, and taper relief softens the outcome only for larger gifts made between three and seven years before death. Good records turn each of those rules from theory into something an executor can rely on.
This article is general information, not personalised financial advice; rules and rates change, so check current guidance or speak to a qualified adviser.
Sources: GOV.UK
