How gifts made in the 7 years before death are treated for IHT, taper relief rates, annual exemptions, and what counts as a potentially exempt transfer.
This guide is part of ProbateHelp's Inheritance Tax guide cluster.
Outright gifts to grandchildren that are not already exempt are generally PETs and become exempt if the donor survives seven years; retained-benefit cases need separate checking. A wedding or civil-partnership gift to a grandchild or great-grandchild has its own £2,500 limit, but the annual exemption, small-gift exemption and normal expenditure out of income may also apply if their conditions are met.
If they gave away their home but continued to live in it without paying market rent, it is a gift with reservation of benefit and remains in the estate for IHT purposes. If they moved out completely and had no further benefit from the property, the 7-year rule applies.
They may be exempt under the 'normal expenditure out of income' exemption if the payments were regular, made from income (not capital), and did not affect the grandparent's standard of living. If these conditions are not met, check whether another exemption or allowance applies; otherwise the payments may be PETs subject to the 7-year rule.
The gift is a failed PET. The first £325,000 is covered by the available nil-rate band, assuming no other gifts or earlier chargeable transfers affect it, so only £175,000 is taxable. If the death falls in the 5-to-6-year band, taper relief reduces the rate to 16%, so the IHT due is £175,000 × 16% = £28,000. GOV.UK treats a death on the anniversary of the gift as falling into the next taper band.
No. Taper relief reduces tax on the part of a gift left chargeable after cumulative transfers use the available nil-rate band. Earlier chargeable transfers, including relevant trust transfers, can reduce the available band, so take specialist advice where those may matter.
The annual exemption is applied to gifts made in the relevant tax year. Any unused amount can be carried forward only to the next tax year, and the current year’s exemption is used first; it cannot be carried forward further.