Gifting Money to Family: Rules and Inheritance Tax Implications
If you survive 7 years after making a gift, it falls outside your estate entirely for inheritance tax purposes — no tax at all, regardless of size. Die within 7 years, and the gift may be taxed depending on your total estate and available allowances. The earlier you start gifting, the more effective it becomes.
Gifting money to children or grandchildren during your lifetime is one of the most effective inheritance tax planning tools available — but the rules around exemptions, the 7-year rule, and taper relief are widely misunderstood. Here's exactly how it works.
Gifts You Can Make Immediately, Tax-Free
Several exemptions let you gift money without ever needing to survive 7 years:
Annual exemption: £3,000 per tax year, which can be split between multiple recipients however you choose. If unused, it can be carried forward one tax year only
Small gifts exemption: £250 per person per year, to as many individuals as you like — provided that person hasn't also received your £3,000 annual exemption
Wedding gifts: up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else, on the occasion of their marriage
Gifts from surplus income: regular gifts made from your normal income (not capital), provided they don't reduce your standard of living, can be entirely exempt with no 7-year wait — but this requires careful record-keeping to evidence
The 7-Year Rule (Potentially Exempt Transfers)
Any gift above your available exemptions is classed as a Potentially Exempt Transfer (PET). If you survive 7 years from the date of the gift, it becomes fully exempt from inheritance tax — permanently outside your estate. If you die within 7 years, the gift may be added back into your estate calculation.
The 7-year clock starts from the date of each individual gift — meaning earlier gifts have a head start over later ones, which is why starting gifting sooner rather than later is generally more effective for estate planning.
How Taper Relief Actually Works
Taper relief is one of the most misunderstood parts of the 7-year rule. Key point: it only applies once your total gifts made in the 7 years before death exceed the £325,000 nil-rate band — and even then, it reduces the tax rate charged, not the value of the gift itself.
Gifts made 0-3 years before death: taxed at the full 40% rate on the amount above your available nil-rate band
3-4 years before death: tax reduced to 32%
4-5 years: reduced to 24%
5-6 years: reduced to 16%
6-7 years: reduced to 8%
7+ years: fully exempt
If your total gifts in the 7 years before death stay under £325,000, they simply use up your nil-rate band — no tax is due on the gifts themselves, and taper relief doesn't come into play at all, since there's no tax to taper.
A Practical Worked Example
Consider someone who gifted £400,000 to one child 4.5 years before death, and £50,000 to another child 1 year before death, with no annual exemptions available and no spouse exemption applying. Total gifts in the 7-year window: £450,000 — above the £325,000 nil-rate band.
The nil-rate band is applied against gifts in the order they were made, earliest first. The £400,000 gift uses the full £325,000 nil-rate band, leaving £75,000 of that gift chargeable — but since it was made 4.5 years before death, taper relief reduces the rate to 24% rather than the full 40%. The later £50,000 gift, made within 3 years of death, is fully chargeable at 40% since none of the nil-rate band remains to offset it.
Making Gifting Part of Your Plan
Effective gifting strategy combines the immediate exemptions (used every year, since unused annual exemptions are largely lost) with earlier, larger gifts that have longer to clear the 7-year window. Keep clear records of every gift — date, amount, recipient, and relationship — since this evidence matters significantly if HMRC ever reviews the estate.
This connects directly to how equity release interacts with inheritance tax, since released equity is sometimes used specifically to fund lifetime gifts. See also our guide on Power of Attorney, since an attorney's ability to continue gifting on your behalf if you lose capacity is limited by law and worth understanding in advance.
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