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. Estimated reading time: 13 min.
Yes. Gifts to grandchildren are PETs in the same way as gifts to children. They become fully exempt if the donor survives seven years. The only special exemption is the wedding gift allowance (£2,500 to a grandchild).
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, they are PETs subject to the 7-year rule.
The gift is a failed PET. The first £325,000 is covered by the nil rate band (assuming no other gifts), 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 only reduces tax on gifts where the total chargeable gifts made in the seven years before death exceed the £325,000 nil rate band. If the gifts are covered by the nil rate band, there is no inheritance tax on those gifts for taper relief to reduce.
No. The annual exemption must be used in the tax year it arises. You can carry forward one year's unused exemption, but only to the following tax year — not indefinitely.