Inheritance Tax and the 7-Year Rule – What You Need to Know

Why the 7-Year Rule Matters

Many people think that once you gift a property, it’s out of your Estate and safe from Inheritance Tax.
If you missed my previous article on Capital Gains Tax when gifting property, it explains the upfront tax many people overlook before even reaching the inheritance stage.
👉 Read it here: Capital Gains Tax on Gifting Property Explained (2025/26)

🎥 Watch: Inheritance Tax and the 7-Year Rule (UK 2025/26)

If you prefer to watch instead, here’s my video where I explain how the 7-year rule works, how taper relief reduces the tax, and why the “gift with reservation” rule can undo your planning.

Then keep reading for examples and HMRC guidance explained in plain English.

HMRC’s 7-year rule determines whether a gift escapes Inheritance Tax (IHT) — and even then, timing, health, and how you use the property all matter.

Understanding how the rule works could save your family thousands in unnecessary tax — or leave them with a bill you didn’t expect.

What Is the 7-Year Rule?

When you gift property, it’s classed as a Potentially Exempt Transfer (PET).
That means no IHT is charged at the time of the gift.
If you survive 7 years from the date of the gift, the value is normally out of your Estate.

But if you die within 7 years, HMRC can claw back IHT on that gift — partially or fully, depending on how long you survived.

Taper Relief – How It Reduces IHT

Taper relief doesn’t reduce the value of the gift, it reduces the tax due on it.

So, if you gift a property worth £400,000 and die after 6 years, taper relief could cut the IHT bill to 20% of the full rate — a huge difference.

The Nil-Rate Band

Everyone gets a £325,000 nil-rate band, meaning the first £325,000 of your estate (including gifts made within 7 years) isn’t taxed.

There’s also the Residence Nil-Rate Band (RNRB) — an extra allowance (currently £175,000) when leaving your home to direct descendants.

However, the RNRB doesn’t normally apply to gifts made during your lifetime — only to property you own at death.

Example 1 – Gift Within 2 Years

You gift a buy-to-let worth £400,000 and die 2 years later.
IHT applies at 40% = £160,000 (before allowances).

Example 2 – Gift After 6 Years

Same £400,000 gift, but you survive 6 years.
Taper relief cuts tax to 20% = £32,000.
Survive the full 7 years and it’s tax-free.

Gift With Reservation – The Trap to Avoid

If you gift a property but continue living in it rent-free, HMRC can treat it as never having left your estate. That’s called a Gift With Reservation of Benefit (GWR).

I explain this in more detail in my next blog: Gift With Reservation – Why Living in a Gifted Property Can Backfire. – blog will be live on 17 October

To make the 7-year rule count, you must:

• Move out, or
  
• Pay full market rent to the new owner and prove it with records.
  

If you don’t, the 7-year clock effectively stops.

Case Study

Margaret gifted her £500,000 home to her daughter but continued living there rent-free.
She died 8 years later.
HMRC still counted the property in her estate because she had the benefit of living there.

Had she paid rent or moved out, the gift would have been outside her estate.

Key Takeaways

• The 7-year rule only works if the gift is complete (no benefit retained).
  
• Taper relief reduces tax between years 3 and 7.
  
• Nil-rate bands apply to total Estate, not just gifts.
  
• Living rent-free in a gifted property cancels the benefit.
  

Final Word

The 7-year rule can be a powerful estate-planning tool — but only if used correctly.
If you want to protect your family and reduce IHT, make sure the timing and structure are right.

Surviving seven years can make your gift free from Inheritance Tax — but not if you still live in or benefit from the property.
👉 Next in this series: Gift With Reservation – Why Living in a Gifted Property Can Backfire(link: Blog 4 coming on 17 October)

📞Book a Property Tax Review to plan your gifts safely and efficiently.