Inheritance Tax & Gifts Calculator (UK 7-Year Rule)

UK Inheritance Tax & Gifts Guide

What do I need to know about The Basics of IHT?

Inheritance Tax (IHT) is charged at 40% on the value of an estate above the tax-free thresholds. Nil-rate band (NRB): £325,000 per person (frozen until 2030). No IHT on the first £325,000. Residence nil-rate band (RNRB): an additional £175,000 when leaving your main home to direct descendants (children, grandchildren, including step and adopted). Combined: an individual can pass on up to £500,000 tax-free (£325,000 + £175,000). Spousal transfer: married couples and civil partners can transfer unused nil-rate band and residence nil-rate band to the surviving partner, potentially giving a combined allowance of up to £1 million tax-free for a couple's estate.

What's the key thing to understand about The 7-Year Rule on Gifts?

Gifts made during your lifetime may be subject to IHT if you die within 7 years. Potentially Exempt Transfers (PETs): most gifts to individuals. If you survive 7 years, they're completely exempt. If you die within 7 years, they count back into your estate. Taper relief: reduces the tax on gifts made 3-7 years before death (NOT the gift value, the tax): 0-3 years before death: 40% (no taper). 3-4 years: 32%. 4-5 years: 24%. 5-6 years: 16%. 6-7 years: 8%. 7+ years: 0% (fully exempt). Important: taper relief only reduces the tax on gifts that exceed the nil-rate band — a gift that falls entirely within the available nil-rate band is not taxed at all, regardless of when it was made.

What should I know about Gift Exemptions?

Some gifts are immediately exempt (no 7-year rule): annual exemption: £3,000 per year. Can carry forward one year's unused (so up to £6,000). Small gifts: up to £250 per person per year (to any number of people). Wedding gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else. Gifts to spouse/civil partner: unlimited and exempt. Gifts to charities: exempt. Normal expenditure out of income: regular gifts from surplus income (not capital) that don't affect your standard of living — are immediately exempt from IHT, with no 7-year wait required.

What's the key thing to understand about Planning and Reality?

IHT planning strategies (general — get professional advice): use the spouse exemption and transferable allowances. Make use of annual exemptions and gifts from income. Consider PETs early (start the 7-year clock sooner). Leave 10%+ to charity (reduces rate to 36%). Trusts (complex — professional advice essential). Business Relief and Agricultural Relief (qualifying business/farm assets — up to 100% relief, though reforms are reducing this from April 2026). Life insurance written in trust (pays IHT-free and outside the estate, often used specifically to cover an expected IHT bill so beneficiaries aren't forced to sell assets quickly to pay it).

The Seven-Year Rule and Why It Shapes Gifting Strategy

Gifts made during your lifetime generally fall outside your estate for Inheritance Tax purposes if you survive seven years from the date of the gift — the "seven-year rule." If you die within seven years, the gift may still count toward your estate, though taper relief can reduce the tax due on gifts made more than three years before death, scaling down the effective rate the closer the gift is to the full seven-year mark. This structure rewards early, deliberate lifetime gifting: the sooner a large gift is made relative to death, the more completely it escapes the estate, which is why Inheritance Tax planning often focuses on gifting as early as reasonably possible, rather than waiting until later in life when the seven-year clock has less time to run out before death.

The Annual Exemptions That Let You Gift Without Starting the Seven-Year Clock

Separate from the seven-year rule, several gifting allowances let money leave your estate immediately and permanently, with no seven-year survival requirement at all: a yearly gift allowance usable each tax year (with one year's unused allowance typically able to carry forward to the following year only), a smaller allowance for gifts to any number of other people, and larger specific allowances for wedding or civil partnership gifts that vary depending on your relationship to the recipient. There is also an exemption for regular gifts made out of surplus income — as opposed to capital — provided they're habitual, don't reduce your standard of living, and come from income rather than savings, which can allow for significant tax-free gifting over time for those with income comfortably exceeding their living costs.

Taper Relief Rarely Means 'No Tax'

<p>A common misunderstanding is that taper relief reduces the Inheritance Tax rate applied to your entire estate once a gift has been held for a few years before death. It doesn't — taper relief only reduces the tax charged on the gift itself, and only applies once a gift has used up the available nil-rate band, meaning it's only relevant to gifts large enough, or made close enough together, that tax would otherwise be due on them. The relief scales down the rate charged in bands as the years between the gift and death increase — roughly 20% less tax for each year past the third, reaching zero additional tax once seven full years have passed. But if a gift falls entirely within the available nil-rate band regardless of timing, there was no tax to taper in the first place, and if death occurs within three years, taper relief gives no reduction at all. It's a genuinely useful relief for large gifts made in years four to seven before death, but it is not a blanket discount that makes gifting within seven years automatically cheaper than people often assume.</p>

Reference: Taper Relief by Years Before Death

Taper relief is one of the most misunderstood parts of IHT: it reduces the tax charged on the gift, not the value of the gift itself, and it only applies at all if the gift exceeds the available nil-rate band once added back into the estate — a gift that falls entirely within the nil-rate band attracts no tax regardless of taper relief, so dying at 6 years rather than 3 years after a gift makes no difference unless the gift was large enough to use up the nil-rate band in the first place.

Worked Example: A Large Gift With Partial Taper Relief

Someone gifts £400,000 to their child and dies 5 years and 4 months later, with a nil-rate band (assumed fully available, no other gifts in the prior 7 years) of £325,000. The gift exceeds the nil-rate band by £400,000 - £325,000 = £75,000, which is the portion potentially subject to IHT. At 5-6 years before death, taper relief of 60% applies, reducing the effective rate from 40% to 16%: Tax due = £75,000 x 16% = £12,000 Had death occurred within 3 years of the gift instead, the same £75,000 excess would have been taxed at the full 40%, costing £30,000 — more than double. This illustrates why taper relief genuinely matters for larger gifts that exceed the nil-rate band, even though it offers no benefit at all for more modest gifts that the nil-rate band already fully covers.

Gifts From Surplus Income: A Separate, Uncapped Exemption

Alongside the annual gift exemption, there's a separate and potentially much more valuable exemption for regular gifts made out of surplus income — income left over after maintaining your normal standard of living — which can be entirely free of IHT with no fixed cap on the amount, provided the gifts are genuinely regular, come from income rather than capital, and don't reduce your own standard of living. This is commonly used for things like regularly paying into a grandchild's savings or pension, or covering a relative's ongoing costs, but it requires careful record-keeping to demonstrate the pattern and the income source to HMRC if ever queried after death, since the burden of proof falls on the estate. Because the rules are specific about regularity and surplus income, this exemption is one where professional advice is particularly worthwhile for anyone planning to rely on it for a significant ongoing gifting strategy.