What is the seven-year Inheritance Tax rule?

The seven-year Inheritance Tax rule: at a glance

• What do I need to know? HMRC usually charges Inheritance Tax on the assets you gifted in the seven years before passing away, if their combined value exceeds £325,000. The total you’re charged depends on when you made the gift.
• What does it mean for me? Understanding tax rules can help you plan and structure gifting during your lifetime to minimise the amount of Inheritance Tax you pay.
• Why does it matter? Prioritising growing your wealth and strategic, tax-efficient gifting can maximise how much your family can inherit.

In the UK, savers are planning to pass on more money to their families than ever before as part of the Great Wealth Transfer between generations.

According to research commissioned by Flagstone, 65% of parents earning over £75,000 per year plan to save over £15,000 for their children’s future.

But with financial gifting comes the risk of paying Inheritance Tax (IHT). Whether you’re ready to start gifting or building your wealth, it’s important to plan how and when to distribute your assets.

This will help to make sure your family inherits as much as possible.

What is the seven-year Inheritance Tax rule? 

The seven-year tax rule is designed to encourage UK taxpayers to gift money before you pass away.

The amount of IHT gradually reduces the longer you live after you’ve made your gift. HMRC generally charges Inheritance Tax on wealth or assets you leave to your family (known as your ‘estate’) worth over £325,000 once you pass away.

This threshold can increase to £500,000 if you leave your home to your children or grandchildren. You won’t pay Inheritance Tax on anything left to your spouse or civil partner.

How does the seven-year Inheritance Tax rule work? 

HMRC generally charges 40% IHT on the value of an estate above the tax-free threshold, as of the date you pass away.

But gifts made during your lifetime can be treated differently.

Potentially exempt transfers

These are known as potentially exempt transfers (PETs). If you gift money or assets, and live for three or more years afterwards, you pay a reduced amount of IHT on the wealth you gave away.

If you live seven years or more after making the gift, the assets become fully exempt from Inheritance Tax. The gradual reduction is known as taper relief. 

How does ‘taper relief’ work within the seven-year Inheritance Tax rule? 

The rate of Inheritance Tax you pay after making a gift tapers down as follows:

To help your loved ones inherit as much as possible, it’s important to structure your gifting in a way that minimises the amount of tax HMRC will charge. 

If you’re unsure how to achieve this in the most effective way for your personal circumstances, consider speaking with a qualified financial adviser.

Why is the seven-year rule important in 2026? 

The Autumn 2025 budget revealed changes to how pensions are treated for Inheritance Tax. From April 2027, most unused pension funds will be included in the value of your estate. Previously, they were considered tax-free gifts.

Current Inheritance Tax thresholds will also be frozen until the 2030/31 tax year. With anticipated inflation and rising property values, more people than ever are likely to possess wealth that exceeds the IHT threshold as a result.

With more people set to trigger Inheritance Tax charges, tax planning for retirement and strategic lifetime gifting are becoming increasingly important. Ensuring you pass on as much wealth as possible relies on reducing the taxable portion of your estate. Early gifting can help you achieve this.

Nobody can predict the future. But carefully spreading gifts over time and keeping a record of the value and date of each gift can help to maximise tax efficiency and security.

Gifting while living 

The seven-year rule means that gifting while living can be much more valuable for your loved ones. By giving assets away early, your beneficiaries are much less likely to pay the full 40% IHT rate.

While there’s no limit to how much you can gift during your lifetime, gifting should be done strategically to minimise IHT and help you accurately calculate Inheritance Tax.

For example, Junior ISAs (Individual Savings Accounts) can grow tax-free savings for younger children over the course of your lifetime. But it’s critical to remember that once you pass away, any money you’ve saved in ISAs will lose its tax-free status.

Annual exemption and small gift allowances

You can gift up to £3,000 per year without it counting towards your estate. Taking advantage of this annual exemption each year allows you to gift money to your children with minimal tax.

Additionally, gifts for weddings, charities, or spouses can be exempt, so using these where appropriate is a smart way to further reduce the taxable value of your estate.

Non-cash gifts

Transferring a property, shares, or assets instead of cash can also be an effective strategy. Once an asset is gifted, its value for tax purposes is frozen at the date of the transfer. This means any future growth will fall outside your estate and can be exempt from Inheritance Tax.

This is why it’s important to keep records of the date, value, and recipient of each gift given, so HMRC doesn’t charge tax to your loved ones unnecessarily.

As part of your lifetime gifting strategy, you can pass on your wealth using trust funds. But the rules are complex, so it’s highly recommended that you speak with a qualified financial adviser before deciding to do this.

Other taxes that can affect your gifts

While gifts can reduce Inheritance Tax, there are other taxes to bear in mind that can affect how much your family gets to keep: 

• Capital Gains Tax: Assets like property or shares can be charged Capital Gains Tax depending on the circumstances. For example, HMRC will charge CGT on profits your children make from a property sale above their annual allowance. This is charged at 24% for property and most other assets.
• Income Tax: HMRC won’t charge Income Tax on the value of a gift. But they will charge it on the income a gifted asset generates. This includes interest, dividends, or rental income. HMRC charges 45% Income Tax for additional rate earners in England, Wales, and Northern Ireland, and 48% for top earners in Scotland. 

Frequently asked questions about the seven-year Inheritance Tax rule

Can I gift £100,000 to my child?

Yes, you can gift £100,000 to your child without paying any Inheritance Tax in certain circumstances. For example, if your estate is worth less than £325,000 in total, or if you gifted the money seven years or more before you passed away.

If you pass away before seven years’ time has elapsed, and your estate is valued above the £325,000 threshold, you’ll most likely pay some IHT on the balance. The exact amount of tax due depends on when you passed away relative to the date you made the gift.

If you’re unsure how much you owe, consider speaking to a qualified financial adviser to discuss your personal circumstances.

Is Inheritance Tax frozen until 2028?

Inheritance Tax thresholds are fixed at current levels until the end of the 2030/31 tax year.

The standard IHT rate of 40% has been in place since 1988 and no scheduled changes are planned as of 2026.

Gift while living to benefit from the Inheritance Tax seven-year rule

The seven-year Inheritance Tax rule could determine the value of the wealth you wish to pass on to your family. Gradually gifting your assets before you pass away can reduce the value of your taxable estate, with taper relief potentially lowering the Inheritance Tax due.

Combining strategic lifetime gifting with other measures, like Junior ISAs, trusts, and growing your wealth during your lifetime, can strengthen your long-term inheritance plan.

Grow before you gift, with Flagstone

Be prepared when the time comes to start gifting. Grow your wealth to provide a healthy inheritance for your loved ones with Flagstone.

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