Inheritance Tax Nil-Rate Band & Gifting Rules Explained (2026/27)

The Inheritance Tax (IHT) nil-rate band doesn’t just sit still, it interacts with gifts made during your lifetime. Understanding how the two work together is central to any sensible estate planning, and it’s an area with more nuance than most people expect.

The nil-rate band recap

Every individual has a £325,000 nil-rate band (sometimes shortened to NRB), the standard IHT allowance that can pass on death, or be given away in the seven years before death, without Inheritance Tax. Anything above it is normally taxed at 40%, unless an exemption or relief applies. Lifetime gifting sits alongside, not instead of, the residence nil-rate band, which is a separate allowance for a main home left to direct descendants rather than for cash or other gifts. See our full guide to Inheritance Tax for how the residence nil-rate band and spouse exemptions fit into the wider picture, and whether there’s any tax to pay once all the allowances are added up.

The 7-year rule

Gifts you make during your lifetime to individuals are known as Potentially Exempt Transfers (PETs). The name is the key to how they work:

• If you survive 7 years after making the gift, it becomes fully exempt from Inheritance Tax, it drops out of your estate entirely.
• If you die within 7 years, the gift is added back into your estate for Inheritance Tax purposes, using its value at the time it was given.

This is set out in full in GOV.UK’s guidance on gifts and Inheritance Tax.

Gifts are counted in the order they were made, starting with the oldest. This matters because it determines how much of your nil-rate band each gift uses up, and how much (if any) is left for the estate itself.

Outright gifts to individuals are treated differently from lifetime gifts into a trust. Money or assets given directly to a person are Potentially Exempt Transfers, but a gift into most types of trust, including a discretionary trust, is instead a chargeable lifetime transfer. Chargeable lifetime transfers become chargeable to tax straight away if they exceed the nil-rate band, on top of being brought back into the calculation if the donor dies within seven years. Trusts have their own rules and tax reliefs, so if a gift into trust is being considered, it’s worth getting that structure checked separately, our guide to trusts covers the basics.

Taper relief

If gifts made within seven years exceed the available nil-rate band, tax may be payable on the excess, but taper relief can reduce the rate depending on how long before death the gift was made:

A common misunderstanding: taper relief reduces the rate of tax on the gift, not the gift’s value or the tax on the rest of the estate. It also only comes into play once the nil-rate band has been used up by earlier gifts, if the gift is fully covered by the nil-rate band, there’s no tax to taper in the first place.

Annual and small gift exemptions

Separately from the 7-year rule, several exemptions let you give money away tax-free with immediate effect, no waiting period at all:

• £3,000 annual exemption, the total value of gifts you can make each tax year without them counting towards Inheritance Tax. If unused, it can be carried forward one year only, so at most £6,000 could be available in a single year.
• £250 small gifts exemption, unlimited number of gifts of up to £250 per person per tax year (but not to anyone who’s also received part of your £3,000 exemption).
• Wedding and civil partnership gifts, up to £5,000 from a parent, £2,500 from a grandparent, or £1,000 from anyone else.
• Gifts out of normal income, regular gifts paid from surplus income (not capital) that don’t reduce your standard of living can be exempt immediately, provided a clear pattern of giving can be evidenced.

Gifts between spouses or civil partners sit outside all of this. Because transfers between spouses and civil partners are exempt from Inheritance Tax regardless of value, they don’t need to rely on the £3,000 annual exemption, the small gifts allowance, or the 7-year rule at all, there’s simply no Inheritance Tax to pay on them in the first place.

Why this matters for planning

The interaction between the 7-year rule, taper relief, and the annual exemptions means the timing and structure of lifetime gifts can materially change the amount of tax payable on an eventual Inheritance Tax bill. Gifts made early, and documented properly, can fall outside the estate entirely; gifts made close to death may still be caught in full, with the full 40% rate applying rather than a tapered one.

Our free Inheritance Tax calculator gives a starting estimate, but because gifting history, exemptions used, and timing all affect the final figure, it’s worth having the detail checked properly, particularly where larger gifts, trusts, or property have been involved. Where a will or a gift into trust also needs drafting, that’s usually a job for a solicitor, while the tax position and any IHT400 paperwork after a death is where an accountant’s help tends to matter most.