Seven-year rule - gifts made in the last seven years

Some gifts are neither exempt from inheritance tax nor immediately chargeable. Instead, they are potentially chargeable if you, as the donor (i.e. the person making the gift), die within seven years from the date of the gift. If you survive seven years from the date of the gift, there will be no inheritance tax to pay.

If you die within seven years, the value of the gift will be offset against any of your tax-free allowance which is available. If the gift exceeds the tax-free allowance, inheritance tax is payable at a rate that depends on the amount of time that has elapsed since the date of the gift:

Years ago that gift was madeInheritance tax payable
Less than 3 40%
3-4 32%
4-5 24%
5-6 16%
6-7 8%
More than 7 0

For example:

  • Molly made a gift of £450,000 to her daughter, Anna, in March 2011.
  • Molly died in January 2015. She made no other gifts during her lifetime.
  • Molly did not survive seven years from the date of the gift to Anna, so there is inheritance tax payable on the gift.
  • The value of the gift is £450,000.
  • Less two annual exemptions £6,000 (remember that annual exemptions can only be carried forward for one year).
  • Less Molly’s nil rate band of £325,000. (To keep it simple, we're saying that Molly did not own her own home, so there was no residence nil rate band available.)
  • The chargeable value of the gift is therefore £119,000.
  • Inheritance tax will be charged at a rate of 32% because the gift was made 3-4 years ago.
  • The inheritance tax due on the gift is £38,080.

Potentially exempt gifts which have become chargeable because the donor has died within seven years need to be reported to HMRC. Technically, the recipient of the gift should submit a Form IHT100 to HMRC, but there is no need to do this if the donor’s executors include the information in the Form IHT400 that they submit to HMRC as part of the administration of the donor’s estate.

Chargeable lifetime gifts

Gifts that are neither exempt nor potentially exempt, are chargeable gifts and subject to inheritance tax immediately at a rate of 20% (with an extra 20% payable if you die within seven years of making the gift). Examples of these are gifts to certain trusts and companies, gifts by close companies and an alteration of share capital by close companies.

If you make a chargeable lifetime gift that exceeds your available nil rate band, generally it needs to be reported to HMRC within 12 months of the date of the gift using Form IHT100.