IHT on a gift under the 7-year rule.
IHT on the gift
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Tax before taper
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Taper relief
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Your breakdown
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The seven-year rule, decoded
Give away money or assets and survive seven years, and the gift falls out of your estate for Inheritance Tax. Die sooner, and it is pulled back in. That is the headline most people know. What trips families up is taper relief, which sounds more generous than it is. Taper relief reduces the tax on a failed gift, not the value of the gift, and crucially it only applies once a gift is large enough to carry tax in the first place. This calculator works through both the nil-rate band and the taper so you can see what would actually be owed if death came at a given point in the seven-year window.
Nil-rate band first, taper second
The order of operations is everything. Each person has a £325,000 nil-rate band, and a failed gift uses that band before any tax is charged. Only the slice above the band attracts the 40 percent rate, and only that tax is then tapered. The relief schedule runs in yearly steps: nothing in the first three years, then 20 percent off the tax for years three to four, 40 percent for years four to five, 60 percent for years five to six, and 80 percent for years six to seven, before the gift drops out entirely at seven years.
A £500,000 gift, donor dies after three and a half years
Use the defaults. You gave £500,000 with the full £325,000 nil-rate band available against it, leaving £175,000 taxable. At 40 percent the tax before relief is £70,000. The donor survived into the three-to-four-year band, so 20 percent taper relief applies, knocking £14,000 off the tax. The final Inheritance Tax on the gift is £56,000.
The trap that makes taper relief worthless
Here is the part advisers spend most time correcting. If your gift is fully covered by the nil-rate band, taper relief does nothing for you, because there was no tax to taper in the first place. Picture a £325,000 gift where the whole £325,000 band is available. The taxable slice is zero, so the tax is zero whether you die after one year or six. People hear "taper relief after three years" and assume a gift made four years ago is partly safe, when in reality a sub-band gift either escapes tax because of the band or, if other gifts have used the band up, gets taxed with relief only on the excess. Gifts are also set against the nil-rate band in chronological order, so an earlier gift soaks up the band and a later one can be left fully exposed.
Who needs this and a planning note
This calculator is for families estimating the exposure on lifetime gifts, executors reconstructing a seven-year history, and anyone weighing up giving now versus later. A practical tip: the £325,000 nil-rate band has been frozen and is set to stay frozen into the late 2020s, so rising asset values quietly pull more estates into charge. Keep dated records of every substantial gift, because the executor will need to list gifts made in the seven years before death, and undocumented transfers cause real disputes. Remember too that taper relief is a feature of the gift rules and is separate from the residence nil-rate band that can apply to a main home passing to direct descendants. Inheritance Tax is a UK-wide tax with no Scottish variation, unlike income tax.
Who actually pays the tax on a failed gift?
Primary responsibility sits with the person who received the gift, the donee, not the estate. If they cannot or will not pay within the time limit, the liability can fall back on the estate, which is why recipients of large gifts are sometimes advised to insure against the donor dying within seven years.
Do small regular gifts use up the seven-year clock?
Several exemptions sit outside the seven-year rule entirely. The £3,000 annual exemption, small gifts of up to £250 per person, and genuine gifts out of surplus income are immediately exempt and never enter the taper calculation. Using these allowances first means only the larger transfers ever need the seven-year survival test.