Making a gift during your lifetime does not automatically remove it from your estate for inheritance tax purposes. If you die within seven years, that gift is brought back into the calculation — and depending on its size and timing, tax may be due.
The gift comes back into your estate
When you die within seven years of making a gift, HMRC treats it as a failed Potentially Exempt Transfer. The value of the gift at the time it was made is added back to your taxable estate. This can push the total above your nil-rate band and create — or increase — an inheritance tax liability.
It is worth noting: it is the value at the time of the gift that counts, not what the asset is worth when you die. If you gave away shares worth £50,000 that are now worth £200,000, only £50,000 is brought back into the calculation.
Gifts are applied in order
Where multiple gifts have been made, they are set against the nil-rate band in chronological order — oldest first. This matters because earlier gifts use up the band before later ones. A large gift made five years ago could mean a smaller gift made last year ends up being fully taxed at 40%.
Taper relief: the tax reduces over time
If the gift is more than three years old when you die, taper relief reduces the amount of tax payable on it. Taper relief does not reduce the value of the gift — it reduces the rate of tax applied to any liability that arises.
| Years between gift and death | IHT rate applied |
|---|---|
| 0 to 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 years or more | 0% |
Taper relief only applies if the gift exceeds the nil-rate band. If a gift falls within the band, there is no tax on it anyway — so taper relief is irrelevant.
Who pays the tax?
In most cases, any inheritance tax due on a failed PET is paid by the recipient of the gift, not the estate. This can come as a surprise to people who received a gift years ago and had no reason to expect a tax bill. It is one of the reasons keeping the recipient informed of the gift — and its potential implications — is good practice.
Know exactly where every gift stands — free on EverLedge
EverLedge tracks each gift against the seven-year clock and shows your executors what they'd need to report to HMRC.
What your executors need to do
Your executors are legally required to report all gifts made in the seven years before your death to HMRC, even if no tax is ultimately due. They need to know:
- The date of each gift
- The value at the time of the gift
- The recipient
- Whether any exemptions applied
Without clear records, executors may have to rely on bank statements, correspondence with recipients, or memory — none of which is reliable. The burden of proof lies with the estate.
In short
- Gifts made within seven years of death are brought back into your estate for IHT purposes.
- They are applied against your nil-rate band in the order they were made.
- Taper relief reduces tax on gifts made three to seven years before death.
- The recipient usually bears any tax liability, not the estate.
- Your executors need clear records of every gift — without them, the process is significantly harder.
This article is general information about UK inheritance tax and is not personal or legal advice. Rules and thresholds can change. Consider speaking to a qualified adviser about your own circumstances.