UK IHT 7-Year Gift Taper Complete Guide 2026/27

Potentially Exempt Transfer (PET): gift to individual outside IHT estate if donor survives 7 years. Section 3A IHTA 1984. Clock starts at gift date. Survival 7+ years: gift fully outside estate. Death within 7 years: gift becomes chargeable transfer, brought back into estate. Taper relief applies after 3 years: reduces IHT (not value). Year 0-3: 100% IHT rate (40%). Year 3-4: 80% × 40% = 32%. Year 4-5: 60% × 40% = 24%. Year 5-6: 40% × 40% = 16%. Year 6-7: 20% × 40% = 8%. Year 7+: 0% (fully exempt). Worked example - £500k gift, donor dies year 4: NRB £325k absorbs first: £325k. Remaining £175k chargeable: at year 4 = 24% tax = £42k IHT.

Multiple exemptions stack: (1) £3,000 annual exemption: per donor per year. Unused carries forward 1 year only. £6k year 1 if previous year unused. (2) £250 small gift exemption: per recipient per year. Unlimited recipients. NOT combinable with other exemptions to same person. (3) Wedding gifts: £5,000 to child, £2,500 to grandchild/great-grandchild, £1,000 to any other. Per donor per wedding. (4) Gifts to spouse / civil partner: unlimited, lifetime + on death. (5) Gifts to charity: unlimited, also reduces estate IHT rate to 36% if 10%+ left to charity in will. (6) Gifts from surplus income: Section 21 IHTA 1984. Must be regular pattern + from income (not capital) + leave donor with normal standard of living. Tax-free immediately - NO 7-year wait. Worked example combining exemptions - donor: £3,000 annual + £250 to each of 4 grandchildren = £1,000 + £5,000 wedding gift to child + £600 / month regular gifts from income (£7,200 / year). Total IHT-free: £16,200 / year. Over 10 years: £162,000 outside estate immediately.

£500k gift to child + donor dies various years later: Year 0 (immediate): full chargeable. £500k - £325k NRB = £175k × 40% = £70k IHT. Year 3: same. Pre-taper window. £70k. Year 3-4: taper 20% relief. £70k × 80% = £56k. Year 4-5: 40% relief. £70k × 60% = £42k. Year 5-6: 60% relief. £70k × 40% = £28k. Year 6-7: 80% relief. £70k × 20% = £14k. Year 7+: 100% relief. £0 IHT. Strategic insight: taper helps only when gift exceeds NRB. Gifts within NRB get no taper benefit (no IHT to taper). NRB allocation order: NRB applied to gifts in chronological order. Earlier gifts use NRB first. Later gifts may have NO NRB left + full 40% IHT (less taper).

Multiple PETs within 7 years: complex interaction. Chronological ordering: (1) Gifts taken in order made. (2) Each gift uses NRB in turn: earliest first. (3) Once NRB exhausted: later gifts fully chargeable. Worked example - 3 gifts: Year -7 (now -6 years before death): £200k gift. Year -4: £200k gift. Year -2: £200k gift. Donor dies now. Calculation: NRB £325k available. Gift 1 (£200k, year 1, no taper - fully exempt by year 7+? Actually year -7 from death now would be 7 years ago, so out of scope. Let me recalc. Simplified: 3 gifts in last 7 years totaling £600k. Gift 1 (£200k): uses £200k NRB. £125k NRB remaining. Gift 2 (£200k): uses £125k NRB + £75k taxable. Taper applies based on year. Gift 3 (£200k): NRB exhausted. £200k fully taxable. Taper based on time before death. Plus estate at death: NRB already used by lifetime gifts - estate has £0 NRB left. Strategic implication: large lifetime gifts deplete NRB available at death. Reverse + complex calculation - specialist solicitor essential.

Gift with Reservation of Benefit: donor continues to benefit from gifted asset. Treated as still owned by donor: still in estate for IHT. Section 102 Finance Act 1986. Common GROB examples: (1) Gift family home to children but continue living there rent-free: GROB. House still in estate. (2) Gift artwork but keep on display in own home: GROB. (3) Gift second home but continue using rent-free: GROB. (4) Gift shares but continue receiving dividends: GROB. Avoiding GROB - pay market rent: (a) If continue using gifted home: pay full market rent to recipient. No GROB. (b) Annual review of rent: must be market level. (c) Tax cost for recipient: rental income taxed. (d) IHT vs income tax trade-off: complex. Pre-Owned Asset Tax (POAT): parallel anti-avoidance. Section 84 + Schedule 15 FA 2004. Income tax charge on benefit from previously-owned asset. Catches some GROBs that avoid IHT GROB. Specialist solicitor essential for property gifting: family home gifts to children very common but GROB risk high. Worked example - mother gifts house to son worth £500k, continues to live rent-free: GROB - house in estate. If son charges market rent £15k / year: No GROB: house out of estate after 7 years. Son pays IT on rental: ~£3k / year basic-rate.

CLT: gifts to discretionary trusts. NOT PETs: immediate IHT charge possible. 20% lifetime rate on excess above NRB: Section 7 IHTA 1984. Plus 7-year clock: if donor dies within 7 years, additional 20% (= 40% total) less taper. Worked example - £500k gift to discretionary trust: NRB £325k absorbs. £175k charged immediate: 20% × £175k = £35k lifetime IHT. Donor dies within 7 years: Additional 20% (= 40% total): less taper. Year 4: additional 20% × 60% taper = 12% × £175k = £21k. Total IHT: £35k + £21k = £56k. 10-year periodic charge: trust pays 6% on excess above trust's own NRB every 10 years. Exit charge: when trust distributes. Strategic considerations: (1) Discretionary trust useful for flexibility: trustees decide distribution timing + amounts. (2) IHT cost upfront vs deferred. (3) Lifetime IHT 20% lower than death rate 40%: can be tax-efficient for large gifts. (4) Specialist solicitor essential: trust establishment £2-10k typical.

Lifetime gifting strategy checklist: (1) Annual exemption £3,000: use every year. £6k year 1 if previous unused. (2) Small gift £250 to multiple recipients: tax-free unlimited. (3) Wedding gifts at relevant events: £5k/£2.5k/£1k. (4) Regular gifts from income: establish pattern. Document 3+ years. Section 21 IHTA exemption. (5) Charity legacy 10%: triggers 36% IHT rate on remainder vs 40%. (6) PETs 7+ years before death: outside estate entirely. (7) Spouse gifts unlimited: spousal exemption. (8) Pension contributions for spouse / children: third-party contributions allowed. (9) Junior ISA contributions for children: £9k / year. (10) Avoid GROB: pay market rent if continued benefit. (11) Specialist solicitor: £200-£500 / hour. Complex family situations. (12) Annual review: gift strategy + estate size + family changes. (13) Document gifts: dates, amounts, recipients, evidence of "out of income" if claiming Section 21. (14) Bank records: trace gift flow. (15) IHT403 form: PRs report PETs at death. (16) Trust structures where appropriate: complex but flexible. (17) Life assurance in trust: pay IHT bill without depleting estate. (18) Will + LPA review: every 3-5 years + after life events. (19) Combined household planning: married couple maximises £650k combined NRB + £350k RNRB. (20) Pre-April 2027 pension extraction consideration: pensions in IHT estate from April 2027.