Reducing Inheritance Tax
Gift exemptions, the 7-year rule, and the taper relief misconception that catches almost everyone out
Inheritance Tax Explained covers what's owed and why. This page covers what you can actually do about it while you're alive, like the exemptions that let you give money away immediately, tax-free, and the rules around larger gifts that only become fully safe after several years.
Gift exemptions at a glance
Some gifts are exempt straight away, with no waiting period at all.
| Exemption | Amount | Notes |
|---|---|---|
| Annual exemption | £3,000 | Per person, per tax year. One year's unused amount carries forward, but only one year. |
| Small gifts | £250 | Per recipient, per tax year. As many recipients as you like, but not combinable with the annual exemption for the same person. |
| Wedding gift to a child | £5,000 | Per marriage or civil partnership. |
| Wedding gift to a grandchild or great-grandchild | £2,500 | Per marriage or civil partnership. |
| Wedding gift to anyone else | £1,000 | Per marriage or civil partnership. |
| Normal expenditure out of income | No limit | Regular gifts from surplus income, provided your own standard of living isn't affected. |
| Spouse or civil partner | No limit | Both UK-domiciled, exempt regardless of amount. |
| Charity or political party | No limit | Fully exempt. |
Worked example: exempt gifts
Say in one tax year you give £3,000 to your annual exemption, £5,000 to your daughter for her wedding, and £250 to a friend as a small gift.
All three exemptions apply independently: £3,000 + £5,000 + £250 = £8,250 given away immediately outside your estate, with no 7-year survival period to worry about at all.
The 7-year rule and taper relief
Give away more than the exemptions above cover, and it becomes a Potentially Exempt Transfer (PET), exempt from Inheritance Tax entirely, but only if you survive 7 years after making it. Die within those 7 years, and the gift is added back into your estate for tax purposes.
If tax turns out to be due, taper relief reduces the rate the longer you survived after giving the gift.
Effective Inheritance Tax rate on a gift, by years before death. Hover, tap, or focus a bar for detail.
Hover, tap, or focus a bar to see what it means
Only relevant once gifts made in the 7 years before death already exceed the £325,000 nil-rate band. Every figure here is the rate on that excess, not on the gift's full value.
Here's the part that catches almost everyone out: taper relief only ever applies to the slice of a gift that's actually taxable, and gifts use up your nil-rate band in the order you made them, oldest first. An early gift can absorb the whole nil-rate band before a later one gets anywhere near it, however long that later gift's own taper relief would otherwise be worth.
Worked example: taper relief and gift order
Say someone makes two gifts before they die: £325,000 to one child 6 years before death, then £100,000 to another child 4 years before death. Gifts are tested in the order they were made, earliest first.
- Gift A (£325,000, 6 years before death): the whole nil-rate band is still available, so this gift uses it up entirely. £325,000 − £325,000 = £0 taxable. Inheritance Tax due: £0.
- Gift B (£100,000, 4 years before death): no nil-rate band left, Gift A already used it all. The full £100,000 is taxable, at the 4–5 year taper rate of 24%: Inheritance Tax due: £24,000.
Being made 4 years before death still helps Gift B, taxed within 3 years, the same £100,000 would owe £40,000 instead of £24,000. But taper relief never gave Gift B any share of the nil-rate band, that was already used up by the time it mattered.
Using your residence nil-rate band correctly
The residence nil-rate band doesn't have to be claimed via a specific gift in your will. It's fine for your home to pass as part of the general residue of your estate rather than being named individually. What matters is that a direct descendant becomes unconditionally entitled to it at the moment you die. Leave it into a trust, or make someone's inheritance conditional on reaching a certain age, and the residence nil-rate band doesn't apply. The entitlement has to be immediate, not eventual.
If you sold or downsized your home before death, a separate "downsizing addition" can still preserve some or all of the residence nil-rate band you would have had. The exact process is complex enough that gov.uk's own calculator is a better starting point than an attempt to summarise it here.
Other reliefs to consider
Leaving 10% or more of your net estate to charity doesn't just exempt that gift, it drops the rate on the rest of the estate too, from 40% to 36% (see Inheritance Tax Explained).
Life insurance is often used alongside the reliefs above: a policy written in trust pays out to beneficiaries directly, outside the estate, specifically to cover an expected Inheritance Tax bill without adding to the very estate value the bill is calculated on.
Trusts more broadly can shift assets out of your estate in other ways too, but the rules are genuinely complex, with their own tax consequences and reporting requirements. This page deliberately doesn't attempt to cover them; a solicitor or financial adviser is the right starting point if a trust looks relevant to your situation.
This page explains general Inheritance Tax planning rules and is not personalised advice; see the disclaimer. Which exemptions, gifts, or reliefs make sense for you depends heavily on your own circumstances; speak to a qualified solicitor or financial adviser before making decisions.