22 October 2026
Lifetime gifts to loved ones can form a cornerstone of effective estate planning, as they can reduce the value of a taxable estate.
According to recent research, the amount of Inheritance Tax (IHT) paid on gifts rose by £13 million when compared to the previous year.
However, uncertainty around the so-called ‘seven-year’ rule and what qualifies as a Potentially Exempt Transfer (PET) can lead to families unintentionally paying more tax.
How is the seven-year rule applied?
Many outright gifts to loved ones and family members can be classified as PETs for IHT purposes. If a donor survives seven years from the date the gift was made, it can fall completely outside the scope of IHT.
The seven-year countdown starts when a gift is fully completed, rather than when it was intended or promised.
For donors who pass away within seven years, the gift is taken into account when calculating IHT liabilities. However, a taper relief may apply.
Taper relief can only be applied to the segment of a gift that surpasses the donor’s nil-rate band of £325,000. The relief only reduces the rate of IHT, not the value of the gift itself.
Relief is tapered according to how long the donor survives after making the gift:
Beyond the seven-year rule, families may benefit from the annual gift exemption, which permits tax-free gifts of up to £3,000 to be made once per year.
Unlike PETs, these gifts are immediately exempt from IHT, with no tax requirement to survive for seven years after they have been donated.
Every individual has could benefit from an exemption of £3,000, allowing a couple to jointly donate up to £6,000 per tax year.
What are the implications of PETs?
Using PETs as part of estate planning can be highly effective in reducing a tax bill, but they are not without associated risks.
UK families paid £315 million in IHT on gifts over the past year, which indicates many families may not be making full use of available gifting exemptions and reliefs.
Foremost, there is always the possibility that the donor may regrettably not survive seven years after making the gift, reducing the tax-saving benefit.
In addition, any gift must be a legitimate donation, with the recipient receiving full and exclusive benefit of the asset.
For example, a house put in someone else’s name but still occupied by the donor would not qualify as a PET, unless the donor was to pay full market-level rent.
If the donor does not fully relinquish enjoyment of an asset, it is known as a Gift with Reservation of Benefit (GWROB).
Unlike qualifying PETs, GWROBs are included in the taxable estate upon death, even though they were ‘given away.’
If these gifts were made with the intention of tax saving, the GWROB classification counteracts the desired benefit.
How can gifts be kept cost-effective?
It is important to record gifts clearly, particularly when they are substantial. Donors should be able to provide auditable evidence of the amount, intention and date of a transaction.
If HMRC were to investigate the estate, a clear paper trail can help demonstrate that a gift was completed correctly and support desirable IHT treatment.
Nevertheless, gifting strategies are often most effective when used in tandem with other estate planning strategies.
Combining annual exemptions with PETs, made over multiple years, can result in greater IHT savings.
Overall, any change in circumstances warrants a review of an estate plan to ensure gifting strategies reflect the individual’s wishes and current situation.
Speak to an accountant
Experts can work in tandem with solicitors to assess the tax implications of your gifting strategies, ensuring there is a clear, documented record of transactions throughout.
Auditing your estate plan with an accountant can help you identify extra opportunities to minimise future tax liabilities.
Early financial advice is crucial for minimising IHT liabilities and ensuring gifting arrangements deliver the greatest possible tax efficiency.
Unsure how lifetime gifts fit into your estate planning? Please get in touch with our accountants for guidance on managing IHT.
