How to reduce inheritance tax: 7-year rule, gifts and trusts.

For many families, inheritance tax is the tax they think about least and pay most reluctantly. It falls at a moment of grief, at a rate of 40% on everything above the tax-free threshold, and it is increasingly paid by households who would never have thought of themselves as wealthy.¹ Rising house prices, frozen allowances and a change that brings most pensions into the estate have widened its reach.

The good news is that inheritance tax is, to an unusual degree, a tax that can be planned for. The thresholds will stay frozen until April 2031,² and from April 2027 most unused pension funds will count towards the estate.³ Against that backdrop, giving during one’s lifetime has rarely mattered more. What follows explains the rules on gifts, the 7-year clock and the role of trusts.

Inheritance tax planning is no longer only for the very wealthy. It is worth reviewing if any of the following applies:

• Homeowners in high-value areas: property alone can take an estate over the thresholds.
• Those with large pension funds: from April 2027 these will usually form part of the estate.
• Business owners and farmers: 100% relief now applies only to the first £2.5 million of qualifying assets.
• Estates above £2 million: the residence nil-rate band is gradually withdrawn above this level.
• Couples on second marriages: where wills, children and allowances need careful co-ordination.

The common thread is wealth that has grown faster than the allowances meant to shelter it.

Everyone has a nil-rate band of £325,000. A further residence nil-rate band of up to £175,000 applies when a home passes to children or grandchildren, so an individual can leave up to £500,000 free of tax.¹ Anything left to a spouse or civil partner is exempt, and any unused threshold passes to the survivor, so a married couple can leave up to £1 million.¹ Above that, tax is charged at 40%, or 36% if at least 10% of the net estate goes to charity.¹

Two caveats matter for larger estates. The residence nil-rate band is withdrawn by £1 for every £2 that an estate exceeds £2 million. And business and agricultural property now attracts 100% relief only on the first £2.5 million, with 50% relief above that.⁴ For many families the realistic aim is not to eliminate the tax, but to reduce the part of the estate exposed to it.

Most gifts to individuals are ‘potentially exempt transfers’. If the giver lives for seven years after making them, they fall out of the estate entirely; if not, they are added back.⁵ Gifts made in the seven years before death use up the nil-rate band first, in the order they were made, which can leave less shelter for the rest of the estate.

Taper relief is often misunderstood. It does not reduce the value of a gift; it reduces the tax on it, and only where gifts made in the seven years before death exceed £325,000. The rate on the excess falls from 40% for deaths within three years to 32%, 24%, 16% and 8% in each following year, reaching nothing after seven.⁵ For most people the real value of the rule is simpler: the clock starts on the day of the gift. Starting early, and keeping records, matters more than any calculation.

Some gifts never enter the calculation at all.⁵

• Annual exemption: £3,000 a year, with one year’s unused allowance carried forward.
• Small gifts: up to £250 per person per year, to any number of people, provided no other exemption is used on them.
• Wedding gifts: £5,000 to a child, £2,500 to a grandchild and £1,000 to anyone else.
• Regular gifts from income: unlimited, provided they come from surplus income and leave the giver’s standard of living intact.

The last is the most powerful and the least used. Paying a grandchild’s school fees, or funding a child’s pension, from surplus income can move substantial sums out of the estate immediately. It relies on good records showing a regular pattern of giving and genuine surplus.

Trusts allow wealth to leave the estate without leaving the family’s control. The person creating the trust chooses the trustees and sets out how money may be used, which is valuable where beneficiaries are young, vulnerable or newly married.

That control comes at a price. Gifts into most trusts are taxed straight away: the amount above £325,000, after counting chargeable gifts in the previous seven years, is taxed at 20%.⁶ The trust then faces a charge on each 10-year anniversary and exit charges of up to 6% when assets leave.⁶ If the settlor dies within seven years, the gift is reassessed at 40%, with credit for tax already paid.⁶

In practice, many families settle up to the nil-rate band every seven years, so that no entry charge arises. Business owners can also place qualifying shares into trust within the £2.5 million relief allowance.⁴

Four mistakes recur.

• Gifts with reservation: giving something away while continuing to benefit from it, such as a home you still live in rent-free, means it still counts towards your estate.⁵
• Capital gains tax: gifts of assets other than cash are treated as sales at market value, so giving away shares or property can trigger a tax bill now.
• Affordability: a gift cannot be taken back. Cashflow modelling can show how much you can give without putting your own security at risk.
• Pensions: from April 2027, unused pension funds will usually form part of the estate,³ so the habit of spending other assets first and preserving the pension needs re-examining.

Inheritance tax rewards those who plan early and record carefully. The 7-year clock favours gifts made sooner rather than later; the exemptions reward regular, modest giving; and trusts allow larger sums to move while keeping a guiding hand on how they are used. None of this should come at the expense of one’s own security. The right amount to give is the amount you can comfortably live without, and working that out is where good planning begins.

This article is for general information only and is not financial, tax or legal advice. Figures reflect the rules in force on 03 November 2026 and may change.