The 7-Year Rule and Gift Taper Relief: A £500,000 Gift Worked Through Year by Year
If you give away money and die within seven years, the gift can be pulled back into your estate for Inheritance Tax. Taper relief can cut the tax — but it almost never works the way people expect. It reduces the tax on the slice of a gift sitting above the £325,000 nil-rate band, not the gift itself, and on a £500,000 gift the bill is rarely zero. Here is exactly how the maths runs, year by year.
The two rules that decide everything
Before any taper, two separate things happen to a gift made within the seven years before death. Get the order wrong and every number after it is wrong too.
Rule 1 — the nil-rate band is set against gifts in date order, oldest first. Each person has a nil-rate band (NRB) of £325,000, frozen at that level until 5 April 2031 (HMRC rates and allowances). When someone dies, HMRC lists every non-exempt gift made in the last seven years and uses the £325,000 against them starting with the oldest. As gov.uk puts it: "List in date order all of the gifts the person who died made in the last 7 years that are not exempt, starting with the oldest first." Whatever band is left over then shelters the death estate.
Rule 2 — taper relief reduces the tax, not the gift. The standard Inheritance Tax rate is 40%. Taper relief applies a percentage discount to that 40% rate based on how many years passed between the gift and death — but only on the part of the gift that exceeds the £325,000 band. As HMRC states: "Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold."
People hear "taper relief" and assume a gift made five years ago is "80% safe". It isn't. Taper never touches the value of the gift, and it never touches the slice covered by the nil-rate band. It only discounts the 40% rate on the amount above £325,000. On a single £500,000 gift, that means relief applies to £175,000 — not the full half-million.
The taper relief table
Taper only starts once a gift survives three years. From there the discount grows each year until, at seven years, the gift falls out of the estate entirely. The official rates from gov.uk — Inheritance Tax on gifts:
| Years between gift and death | Taper relief (% off the tax) | Effective tax rate on the taxable slice |
|---|---|---|
| Less than 3 years | 0% (no relief) | 40% |
| 3 to 4 years | 20% | 32% |
| 4 to 5 years | 40% | 24% |
| 5 to 6 years | 60% | 16% |
| 6 to 7 years | 80% | 8% |
| 7 or more years | 100% (gift is exempt) | 0% |
Read the table carefully. The first column is the relief percentage — how much is knocked off the tax. The third column is what that leaves as the effective rate. A gift surviving 5 to 6 years gets 60% off the 40% rate, leaving 16%. That 16% figure is the one HMRC uses in its own worked examples.
Worked example: a £500,000 gift, five years before death
Meet Margaret. In June 2021 Margaret gave her daughter Priya a cash gift of £500,000 to help buy a home. Margaret made no other gifts. She dies in August 2026 — 5 years and 2 months after the gift, so it falls in the 5-to-6-year band. Here is the calculation step by step.
Step 1 — Is it a chargeable gift? Yes. The gift was made within seven years of death, so this "potentially exempt transfer" (PET) has failed and becomes chargeable.
Step 2 — Set the nil-rate band against it, oldest first. It is the only gift, so the full £325,000 NRB is available to it.
- Gift: £500,000
- Less nil-rate band: −£325,000
- Taxable slice (above the NRB): £175,000
Step 3 — Apply the 40% rate to the taxable slice only.
- £175,000 × 40% = £70,000 tax before taper
Step 4 — Apply taper relief. Margaret survived 5 to 6 years, so 60% is taken off the tax.
- £70,000 × 60% taper relief = £42,000 reduction
- £70,000 − £42,000 = £28,000 tax due
(The same answer comes from the effective-rate shortcut: £175,000 × 16% = £28,000.)
Step 5 — Who pays? Because this is a failed PET, the recipient is liable. Priya, not Margaret's estate, is primarily responsible for the £28,000. HMRC is explicit: "the person who gets a gift in these last 7 years will have to pay the Tax."
The headline: taper saved £42,000 of tax, not the whole bill. Without taper the figure would have been £70,000. The £325,000 covered by the band carried no tax at all — taper never even reached it.
Why the answer is not £0 — and not 40% of £500,000 either
Two wrong instincts collide here:
- "She lived more than five years, so it's tax-free." No — the seven-year clock has to run all the way out for the gift to be fully exempt. At 5 years 2 months, only 60% of the tax is relieved.
- "It's 40% of £500,000, so £200,000." No — the £325,000 nil-rate band is set against the gift first, so 40% only ever applies to the £175,000 above the band, and taper then cuts that further.
What changes when there is more than one gift
The "oldest first" ordering matters most when several gifts compete for one £325,000 band. The band is used up by the earliest gifts; later gifts may get little or no band — but they may sit in a higher taper bracket because they were made closer to death. A common, counter-intuitive outcome: an older gift escapes tax entirely (covered by the band) while a newer one is fully taxed (band already exhausted) yet still attracts little taper because it is recent. Always run the gifts in strict date order before touching the taper table.
- The nil-rate band (£325,000, frozen to 5 April 2031) is set against gifts in date order, oldest first — do this before any taper.
- Taper relief reduces the tax, not the value of the gift, and only on the slice above the nil-rate band.
- The taper scale: 20% off at 3–4 yrs, 40% at 4–5, 60% at 5–6, 80% at 6–7, 100% at 7+ (fully exempt).
- On Margaret's £500,000 gift at 5 yrs 2 months: £175,000 taxable × 40% = £70,000, less 60% taper = £28,000 due.
- On a failed PET, the recipient of the gift pays the tax — not the estate.
- Taper relief only exists at all once total gifts in the 7 years exceed £325,000.
Official sources
- gov.uk — Inheritance Tax: gifts & the 7 year rule (taper relief table, 40% rate, £325,000 threshold)
- gov.uk — Work out Inheritance Tax due on gifts (date-order allocation; recipient liability)
- gov.uk — IHT thresholds & interest rates (£325,000 frozen to 5 April 2031)
- gov.uk — Inheritance Tax overview (standard 40% rate)
Frequently asked questions
Does taper relief reduce the value of the gift?
No. Taper relief reduces the rate of Inheritance Tax charged, not the value of the gift. In HMRC's own example the gift "remained valued at £475,000" while the tax was simply charged at a reduced rate. Taper also only applies to the part of the gift above the £325,000 nil-rate band.
If I gave £500,000 five years before I die, is the tax zero?
No. At 5 to 6 years, taper takes 60% off the tax — not all of it. After setting the £325,000 band against the gift, £175,000 is taxable at 40% (£70,000), reduced by 60% taper to £28,000. The gift only becomes fully exempt after a full seven years.
Who pays the tax on a gift if the giver dies within 7 years?
The recipient of the gift is primarily liable, not the estate. gov.uk states "the person who gets a gift in these last 7 years will have to pay the Tax." If they don't pay it within the deadline, the liability can fall back on the estate, so executors and beneficiaries should coordinate.
In what order are gifts set against the nil-rate band?
In date order, oldest first. HMRC lists all non-exempt gifts in the seven years before death starting with the earliest, and uses the £325,000 band against them until it runs out. Only the gifts (or parts of gifts) above that running total are taxable.
When does taper relief apply at all?
Only when the total of gifts in the seven years before death exceeds £325,000, and only for gifts that survived at least three years. If total gifts are within the nil-rate band, there is no tax to taper, so taper relief is irrelevant.
How long is the £325,000 nil-rate band fixed?
The nil-rate band is £325,000 and is frozen at that level until 5 April 2031, per HMRC's published thresholds. The standard Inheritance Tax rate remains 40%.
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