The seven-year rule – ‘Potentially Exempt Transfers’
Gifts you make to individuals should be exempt from IHT as long as you live for seven years after making the gift. These are known as ‘Potentially Exempt Transfers’ (PETs). (Note that gifts to spouses, civil partners or charities are exempt from IHT in any event.)
However if you give an asset away at any time, but keep an interest in it – for example you give your house away but continue to live in it rent-free – this gift will not be a PET.
If you die within seven years of making a gift or gifts and the total value thereof is less than the IHT tax free allowance, then the value of the gifts uses up part of your IHT tax free allowance, leaving less of it available for the use of your estate. If your estate exceeds the remaining tax free allowance then IHT will be due.
However, if you die within seven years of making a gift and the gift is valued at more than the IHT tax free allowance, IHT will need to be paid, either by the person receiving the gift or by the personal representatives of the estate, i.e. the Executors or Administrators.
If you die between three and seven years after making a gift, and the total value of gifts that you made is over the IHT tax free allowance, any IHT due on the gift is reduced on a sliding scale. This is known as taper relief.