Gifting during your lifetime:
when it helps
and when it doesn't

The seven-year rule and taper relief

The cornerstone of lifetime gifting is the seven-year rule. If you make a gift and survive for seven years from the date of that gift, it falls out of your estate entirely for inheritance tax purposes. The gift becomes what the law calls a "potentially exempt transfer" - potentially exempt because it only achieves full exemption if you survive long enough.

If you die within seven years of making a gift, it is brought back into your estate and taxed. However, taper relief reduces the rate of tax that applies if you survive between three and seven years from the date of the gift:

• 0–3 years: 40% (full rate)
• 3–4 years: 32%
• 4–5 years: 24%
• 5–6 years: 16%
• 6–7 years: 8%
• 7+ years: 0% - the gift is fully exempt

Taper relief applies to the tax, not the value of the gift. And it only applies if the cumulative value of taxable gifts exceeds the nil-rate band. For most people, it is the seven-year clock that matters most.

Exempt gifts: no seven-year clock needed

Several categories of gift are exempt from IHT immediately - no seven-year survival period required.

Regular gifts from surplus income

One of the most powerful and underused gifting exemptions is the normal expenditure out of income exemption. If you make regular gifts from your surplus income - money left over after meeting your usual living expenses - those gifts can be exempt from IHT regardless of size, provided three conditions are met:

• The gifts must be made from income, not capital
• They must form part of your normal expenditure - a regular pattern, not a one-off
• After making the gifts, you must retain sufficient income to maintain your usual standard of living

This exemption requires careful documentation. HMRC will want to see evidence that the gifts were regular, made from income, and that your lifestyle was not impaired. Keeping a simple record - the amounts, dates, and source of income - is essential to make the exemption stick if challenged.

Potentially Exempt Transfers

Any gift that does not fall within an exempt category is a Potentially Exempt Transfer (PET). PETs start the seven-year clock on the date the gift is made. If you survive seven years, the gift drops out of your estate. If you do not, it is brought back in and taxed - potentially at the full 40% rate, or at a tapered rate if you survive more than three years.

A PET can be of any size. There is no cap. Giving your daughter £200,000 towards a house deposit is a PET. The full amount starts the clock on the day of transfer.

Gifts into trusts: Chargeable Lifetime Transfers

Gifts into most types of trust are treated differently - they are not PETs but Chargeable Lifetime Transfers (CLTs). A CLT is taxed immediately at 20% if it exceeds your available nil-rate band. The trust then pays a further charge every ten years and on exit of assets. Trusts remain a useful planning tool, but the tax treatment of gifts into them is more complex and requires careful advice.

When gifting helps - and when it doesn't

Gifting reduces your estate and can significantly lower an IHT bill over time. It is most effective when:

• You have surplus income or capital that you genuinely do not need
• You start early enough for gifts to clear the seven-year threshold
• The recipients are people or causes you would want to benefit in any case
• The gifts are documented properly so exemptions can be claimed

There are also some important caveats to bear in mind:

• Gifts with reservation of benefit can still be treated as part of the estate.
• Gifts must be genuine and properly documented.
• Gifts into trusts may be chargeable lifetime transfers, not PETs.
• Surplus income gifts need records of income, expenditure and pattern.

Gifting is less effective - and potentially counterproductive - when it impairs your financial security. Giving away capital you may need for care costs, home maintenance, or unexpected expenses creates a different kind of problem. No tax saving is worth compromising your own financial position in later life.

The starting point for any gifting strategy is a clear picture of what you actually need - and what genuinely is surplus. That calculation changes over time, which is why a gifting programme works best when reviewed regularly alongside your broader estate plan.