Gifts made within seven years of death

A guide to the seven year rule for gifts, including inheritance tax implications, taper relief and the responsibilities of executors and administrators.

Key takeaways: 

• The seven year rule means some gifts made during a person's lifetime may still be considered for Inheritance Tax (IHT) purposes if they die within seven years of making them
• Executors and administrators need to identify these gifts when administering an estate

When someone dies, personal representatives (executors or administrators) must make sure the right amount of IHT is paid.

As part of this, they need to report to HM Revenue & Customs (HMRC) any relevant gifts that the deceased may have made in the seven years before they died.

Personal representatives must make adequate enquiries to identify such gifts. If they don’t take reasonable care to make a complete return, then tax-geared financial penalties are likely to follow.

This guidance sets out some of the basic and most obvious things that personal representatives should check. Whilst this guidance is intended to be wide-ranging, it shouldn't be regarded as conclusive or final and you may need to make additional enquiries that aren't listed.

What's the seven year rule for gifts?

In the UK, the seven year rule is a key part of IHT and applies to many lifetime gifts made by an individual. Personal representatives must consider this rule when reviewing gifts made by the deceased. This may include gifting property, money, valuable possessions, investments, or assets sold for less than their market value. 

Many gifts made directly to individuals are treated as potentially exempt transfers (PETs). This means that the tax treatment depends on how long the person lived after making the gift:

• If the deceased survived seven years after making the gift, it’s usually free from IHT
• If they died within seven years, some or all of the gift may be taken into account when calculating the IHT due on the estate

In simple terms, these are outright gifts with no ongoing benefit to the person who made them, and they only become fully exempt if the seven year period is met.

Therefore, you’ll need to identify gifts made in the seven years before death and assess whether they affect the estate for IHT purposes.

Are all gifts subject to IHT?

Not all gifts follow the seven year rule. It only applies to PETs, which are usually straightforward gifts made directly to individuals.
Other types of gifts are treated differently in the UK and may not become exempt after seven years. 

For example:

• Gifts into most trusts aren't PETs and may be subject to different IHT rules
• Gifts where the deceased continued to benefit from the asset (known as gifts with reservation of benefit), such as gifting property but continuing to live in it, are still treated as part of the estate for tax purposes
• Exempt gifts, such as certain gifts between spouses or within annual allowances, are outside the scope of IHT altogether and don’t rely on the seven year rule

As a personal representative, the key distinction is whether the gift was a genuine, outright gift to an individual with no strings attached. These are the gifts that fall within the seven year rule.

If you’re unsure how a gift should be treated, contact our team for guidance to help ensure the estate is reported accurately.

What counts as a gift for IHT purposes?

Gifts can happen in lots of different circumstances, not just when property or money is given to a friend or relative. All the following involve making a gift:

• Where an asset is sold for less than its full open market value, such as a sale of a house to a relative below its proper value.
• Where a debt has been written off – this is a gift by lender to borrower.
• Where items are paid for by the deceased on someone else’s behalf eg, holidays, bills.
• Where an asset is acquired by more than one person, but they hold that asset in different proportions to their contributions. For example a house may be owned by a husband and wife in equal shares but the husband may have funded the entire purchase. In this situation, there’s a gift from husband to wife.
• Where property is transferred into a trust or settlement.
• Where someone has an interest in a trust but that interest came to an end before the person died.
• The payment of premiums where life policies are written in trust (unless the premiums are paid from monies already held in the same trust).

Is tax on gifts fixed within the seven year period?

The tax on PETs made within seven years of death is variable. As a personal representative, you’ll need to look at when each gift was made and whether it’s subject to IHT.

If tax is due, it may be reduced depending on how long the deceased lived after making the gift. 

What’s taper relief?

Taper relief can reduce the amount of IHT payable on a PET if the person who made the gift dies within seven years. 

How taper relief is calculated depends on the time between the gift being made and the person's death. No reduction applies during the first three years, but after that the IHT payable on the gift may be reduced. It's important to remember that taper relief reduces the tax due, not the value of the gift itself.

Taper relief isn’t automatic for every gift. It only applies where IHT is payable on the gift in the first place. If no tax is due, there’s nothing for taper relief to reduce.

The table below shows how the rate of tax may reduce depending on how long the deceased survived after making the gift. 

Does the seven year rule apply to joint gifts?

If two individuals make a joint gift, HMRC will usually treat it as two separate gifts (PETs). Each person is treated as giving their own share, with the seven year rule applying individually. This share is often assumed to be equal unless evidence proves otherwise. 

Therefore:

• If both individuals survive seven years, both parts of the gift become exempt
• If one person dies within seven years, only their share of the gift is brought back into their estate and may be subject to IHT
• If both individuals die within seven years, each share is considered separately and may be subject to IHT

In short, the seven year rule applies per person, not per gift. This is regardless of whether it’s made from a joint account or as separate contributions intended to form a joint gift.

Who pays IHT on gifts?

In most cases, the person who received the gift is responsible for paying any IHT due if the donor dies within seven years. 

However, if the recipient doesn't pay this tax, this can be recovered from the estate by HMRC. This is because the estate remains responsible for ensuring the correct amount of IHT is paid overall.

How should I investigate lifetime gifts?

In most cases, this will involve personal representatives asking family members, friends, associates, those named in any will, any attorney for the deceased and the deceased’s professional advisors (solicitors, accountants or financial advisors) whether they received or have any knowledge of such gifts.

Ideally, ensure that all requests for information are made in writing and ask for written responses so that there’s evidence that enquiries have been made.

Gift recipients should be made aware of the possible financial penalties they could incur for failing to disclose gifts made to them.

What if recipients don’t disclose gifts?

Sometimes, a tax underpayment resulting from an undisclosed gift may be the fault of the gift recipient, not the personal representatives, if they fail to tell the personal representatives about the gift.

The best advice for personal representatives is to make it clear that there’s also an obligation on the recipient of any gift to report it (Schedule 24 Para 1A Finance Act 2007).

If the recipient of any gift fails to tell the personal representatives about the gift and fails to report it, they could face significant financial penalties. The minimum penalty in these circumstances is 50% of the undeclared tax and could be up to 100% of the undeclared tax. Importantly, the penalty in these cases is payable by the recipient of the gift, not the personal representative. This approach has been confirmed in the case of Commissioners for Hutchings v HMRC.

Final thoughts

Taking a careful and structured approach to enquiring about lifetime gifts will help ensure the correct IHT position is reported and reduce the risk of penalties.

If you're unsure at any stage, contact our solicitors who can help you ensure everything is handled correctly.

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