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Inheritance tax on lifetime gifts: the seven-year rule and taper relief, worked for a client's £500,000 gift
A £500,000 gift over the £325,000 nil-rate band costs £70,000 in tax if the client dies within 3 years, and £28,000 after 5 to 6 years. Taper relief.
A client of 66 asks the adviser whether she can give £500,000 to her daughter now for a house deposit and "get it out of the estate". The answer turns on two things the client does not control: how long she lives, and what she has already given away.
The rule on GOV.UK
The page says: "No tax is due on any gifts you give if you live for 7 years after giving them." Gifts made in the 3 years before death are taxed at 40%. Between 3 and 7 years, a taper reduces the rate, and it applies only if gifts in the 7 years before death total more than £325,000:
| Years between gift and death | Rate of tax |
|---|---|
| less than 3 | 40% (full rate) |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7 or more | 0% |
The £325,000 nil-rate band is the tax-free threshold, and the page says the person receiving the gift may have to pay the tax instead of the estate.
The £500,000 gift, worked
Take the £500,000 above the £325,000 band: £175,000 is chargeable.
| Death after | Rate | Tax on the gift |
|---|---|---|
| under 3 years | 40% | £70,000 |
| 3 to 4 years | 32% | £56,000 |
| 4 to 5 years | 24% | £42,000 |
| 5 to 6 years | 16% | £28,000 |
| 6 to 7 years | 8% | £14,000 |
| 7 years or more | 0% | £0 |
Our arithmetic: £175,000 times each rate. Two points follow. The taper cuts the tax, not the gift: the £500,000 still counts in full against the nil-rate band whatever the year of death. And on the page's own wording the taper applies only where gifts total more than £325,000, so a client giving £300,000 faces no tax and needs no taper, but uses up most of the band for seven years.
Smaller gifts that sit outside it
- £3,000 a year annual exemption, with an unused amount carried forward for one tax year only, so a client who gave nothing last year can give £6,000 now.
- £250 per person per year small gifts, if no other allowance was used on the same person.
- Wedding or civil partnership gifts: £5,000 to a child, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else.
- Normal expenditure out of income, with no set limit, provided the client can afford it after usual living costs.
What to have to hand at the review
- A dated list of gifts over the last 7 years, with who received them.
- The estate figure, so the gift is set against the right band: see the residence nil-rate band and the taper at £2 million.
- The pension picture, since more is changing: see pensions and inheritance tax from April 2027.
- The review file note: see the annual review checklist.
I did not read what the page says about gifts into trusts, gifts with reservation, how earlier gifts use up the band in order, or the residence nil-rate band. Take advice on the client's circumstances before relying on the table.
Overlyft builds AI staff who join your advice team and keep a dated gift register per client, draft the year-by-year illustration above, and leave it for the adviser to review and sign.
This is general information, not financial or tax advice. Check GOV.UK and the client's circumstances before you advise.
Where this comes from: GOV.UK, "Inheritance Tax: gifts" (no tax if the donor lives 7 years after the gift; gifts in the 3 years before death taxed at 40%; taper rates 32%, 24%, 16%, 8% for 3 to 4, 4 to 5, 5 to 6, 6 to 7 years; taper applies only where gifts in the 7 years total over £325,000; annual exemption £3,000, carry forward one year; £250 small gifts; wedding gifts £5,000, £2,500, £1,000; normal expenditure out of income). Read 14 October 2026.
AEO Lookup editorial team
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