Gifts made during a person’s lifetime are exempt from inheritance tax (IHT) if the donor survives for seven years after making the gift.
If the donor dies within seven years of the gift, the gift’s value is added to the estate and taxed on a taper relief basis. Taper relief reduces the tax rate on gifts made between 3 and 7 years before death. Currently (2024/2025) the rates decrease as follows:
- 0 to 3 years: 40%.
- 3 to 4 years: 32%.
- 4 to 5 years: 24%.
- 5 to 6 years: 16%.
- 6 to 7 years: 8%.
- Beyond 7 years: 0% (gift fully exempt).
The tax-free amount before a person has to pay inheritance tax on any estate received is currently set at £325,000.
This threshold applies to both estates and gifts made within the seven-year period. Gifts do however have exemptions:
- An annual exemption of up to £3,000 per tax year.
- Small gift exemptions of up to £250 per person per tax year.
- Wedding or civil partnership gifts: up to £5,000 for children, £2,500 for grandchildren, and £1,000 for other recipients.
- Unlimited gifts between UK-domiciled spouses or civil partners.
- Regular gifts from surplus income (normal expenditure out of income) are also exempt.
Gifts made with a reservation of benefit (e.g., giving away a home but continuing to live there) are treated as part of the donor’s estate for IHT purposes.
Labour Chancellor Rachel Reeves is considering making changes to the way inheritance tax applies to gifts - in attempts to plug an over £20 billion hole in public finances. The possible changes under consideration include:
- The exemption period could be extended from seven to 10 years. Under this approach, gifts would only become fully exempt from inheritance tax after 10 years, thereby extending the period during which taper relief applies. This change would potentially increase the tax liability on estates by capturing more gifts within the taxable period.
- Removal altogether of the seven year gifting rule and replacement with a new lifetime gift allowance. All lifetime gifts being subject to IHT unless covered by specific exemptions or thresholds. This would fundamentally change wealth transfer planning, as all gifts—even those made long in advance—could become taxable.
Extending the rule to 10 years would be the simplest change to make but would disrupt those with established estate planning strategies, in particular high-net-worth individuals - though they may be the intended target.
Industry experts caution that abolishing the seven-year rule could lead to immediate taxation of all lifetime gifts, forcing significant revisions in wealth transfer strategies and introduce. The added tax code complexity of a new lifetime gift allowance would also be unwelcome.
