Inheritance Tax and lifetime gifts
Who this guide is for: For anyone reviewing gifts made in life and how they interact with Inheritance Tax after death — educational only, not tax-planning advice.
Inheritance Tax is mainly thought of as a tax on death. Lifetime gifts still matter: some are exempt, some become chargeable if you die within seven years, and some remain in the estate if you keep benefiting from what you gave away.
This guide explains the mainstream personal rules. It does not cover aggressive planning, and it is not a guide on how to "avoid" Inheritance Tax.
What counts as a gift
For Inheritance Tax, gifts commonly include:
- money
- household and personal goods
- a house, land or buildings
- listed shares, and some unlisted shares depending on how long they were held
Selling something for less than it is worth can also create a gift equal to the undervalue — for example selling a house to a child below market value.
Assets left in a will are not lifetime gifts; they form part of the death estate. For the estate path see Inheritance Tax Explained.
Potentially exempt transfers and the seven-year rule
An outright gift to an individual is often a potentially exempt transfer (PET). If the donor survives seven years after the gift, no Inheritance Tax is normally due on that PET. Exceptions include gifts with reservation of benefit and many gifts into trusts, which follow different rules.
If the donor dies within seven years, the gift can become chargeable. It may use some or all of the nil-rate band available at death. Once gifts in the seven-year window exceed the available nil-rate band, tax can arise on the excess — often paid by the estate, and sometimes by the recipient when gifts are large.
Chargeable lifetime transfers into some trusts can create tax during life as well as on death. Trusts are only flagged here as a complexity — get specialist advice if trusts are involved.
How gifts use the nil-rate band
Lifetime gifts in the seven years before death are generally set against the nil-rate band before the death estate. Where several gifts fall in that window, they are normally considered in chronological order (earlier gifts first) when working out how the band is used. The residence nil-rate band does not shelter lifetime gifts — it only helps the death estate when its own conditions are met. See Residence Nil-Rate Band.
Taper relief
Taper relief applies to Inheritance Tax attributable to a chargeable gift when death falls more than three years, but not more than seven years, after the gift. It reduces the rate of tax on that gift. It is not a general discount on the capital value of every gift made three to seven years before death.
| Years between gift and death | Tax rate on the gift |
|---|---|
| 0 to 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7 or more | 0% |
GOV.UK states that taper relief only applies where the total value of gifts in the seven years before death is over the £325,000 tax-free threshold. Gifts in the three years before death that are chargeable above that threshold are taxed at the full 40% rate on the gift.
Lifetime gift exemptions
| Exemption | Limit / rule |
|---|---|
| Annual exemption | £3,000 per tax year; unused amount carry-forward one year only |
| Small gifts | Up to £250 per person per tax year (not combined with another allowance on the same person) |
| Wedding / civil partnership | £5,000 to a child; £2,500 to a grandchild or great-grandchild; £1,000 to anyone else |
| Normal expenditure out of income | Regular gifts from income after usual living costs; no fixed cash cap stated |
| Spouse or civil partner | Normally exempt if the couple meet the official conditions |
| Charities and political parties | Gifts to qualifying bodies are normally exempt |
Wedding and annual exemptions can usually be combined for the same person; the small-gift allowance cannot be stacked with another allowance on the same person. Birthday or Christmas gifts from regular income are also treated as exempt under the gifts guidance.
Gifts with reservation of benefit
If you give something away but still benefit from it, it can be a gift with reservation. Common examples include giving your home to a relative but continuing to live there rent-free, or giving away an asset you still use for free.
Property subject to a reservation can still count towards the value of your estate for Inheritance Tax. Continuing to live in a house you have "given away" is therefore treated differently from a clean gift you no longer benefit from. Detailed conditions are in HMRC's Inheritance Tax Manual and GOV.UK gifts guidance.
Record keeping
The person dealing with your estate will need to reconstruct gifts in the seven years before death. Keep records of:
- what you gave and who received it
- the value at the time of the gift
- the date of the gift
- which exemption, if any, you intended to use
Worked examples
Annual exemption with one-year carry-forward
Illustrative only — not computed by the Inheritance Tax Calculator.
| Tax year 1 gift to child A | £2,000.00 |
|---|---|
| Unused annual exemption carried forward | £1,000.00 |
| Tax year 2 gift to child B | £4,000.00 |
| Annual exemption used in tax year 2 | £3,000.00 |
| Brought-forward exemption used | £1,000.00 |
| Amount treated as a PET after exemptions (key figure) | £0 |
Mirrors the structure of GOV.UK's annual-exemption example with original figures. Carry-forward lasts one tax year only.
Gift taxed after the nil-rate band is used
Illustrative PET maths using GOV.UK taper rates — not a calculator output.
| Earlier gift (uses full NRB) | £325,000.00 |
|---|---|
| Later gift to another person | £100,000.00 |
| Years between later gift and death | 3 to 4 |
| Tax rate on later gift after taper | 32% |
| Inheritance Tax on later gift (key figure) | £32,000.00 |
Assumes both gifts fall inside seven years of death, no other exemptions apply to these amounts, and the earlier gift consumes the entire £325,000 nil-rate band. The death estate may still have its own tax calculation.
Estimate the death estate only — lifetime gifts are outside this calculator Use the Inheritance Tax Calculator
Where this sits in the Sorvuna cluster
Return to Inheritance Tax Explained for the estate overview, or the Inheritance Tax hub for all related tools and guides.