Many taxpayers have heard of a ‘seven-year rule’ for inheritance tax (IHT) purposes. It is widely assumed that lifetime gifts escape the IHT net if the donor survives at least seven years after making the gift. Whilst this is generally true, what happens if the donor dies within seven years of making gifts – is it only gifts made in the last seven years that are considered? As with most tax questions, the answer is not necessarily straightforward.
The Seven-Year Rule
The seven-year rule refers to ‘potentially exempt transfers’ (PETs), such as a cash gift from one individual to another. A PET made seven years ago or more becomes an exempt transfer. Conversely, a PET becomes a chargeable transfer if made within seven years of death (i.e., a failed PET).
Didn’t Last Out!
IHT is chargeable on a deceased’s death. Furthermore, chargeable lifetime transfers are cumulated; the IHT rate will depend on the total value of such transfers made within the seven years ending with the latest transfer. After seven years, those transfers generally drop out of the cumulative total. On the individual’s death, chargeable transfers to be cumulated include ‘immediately chargeable’ transfers (e.g., lifetime gifts to a discretionary trust) and failed PETs.
Up to 14 Years
When calculating the IHT in respect of failed PETs, it may be necessary to look back at transfers made more than seven years before the date of death, up to a maximum of 14 years in total. For example, if a PET was made six years and 11 months before death, the period 13 years and 11 months will need to be considered. However, only those transfers made more than seven years before death which were immediately chargeable need to be taken into account.
Example: The Tale of a Long ‘Tail’
Robert died on 1 March 2025. He had gifted an investment property worth £250,000 (ignoring the annual exemption) into a family discretionary trust on 31 December 2016. He subsequently gifted another property worth £320,000 to his son on 31 May 2023.
- Lifetime gifts – The gift into the discretionary trust was an immediately chargeable lifetime transfer, but no lifetime IHT was paid as the value of the investment property was within Robert’s available nil-rate band (£325,000 for 2016/17). The subsequent gift of a property to his daughter was a PET when made, so no lifetime IHT was payable.
- IHT on death – Robert’s lifetime gift into the discretionary trust was made more than seven years previously, so no IHT is payable on death. The gift to Robert’s daughter was a PET made within seven years of death, which therefore becomes chargeable. The gift to the discretionary trust (although made more than seven years before death) is cumulated, as it was made within seven years of the PET. The IHT position is:
| Gift into discretionary trust | £250,000 | IHT on gift to son of £320,000: | |
| Nil-rate band remaining (£325,000 – £250,000) | £75,000 | £75,000 x Nil | Nil |
| £245,000 x 40% | £98,000 |
If Robert’s gift on 31 December 2016 had been a PET (e.g., another gift to his son) instead of an immediately chargeable transfer, no IHT would have been payable on the gifts.
Practical Tip
Cumulations of lifetime gifts for IHT purposes on death can be avoided by waiting at least seven years between gifts.