“You may survive seven years, but will ‘the seven-year rule’ survive?”—rumours surrounding the upcoming Autumn Budget 2025

The seven-year rule is widely known. In its most basic form, if an individual makes a capital gift of any size during their lifetime (known as a Potentially Exempt Transfer – PET), provided they survive seven years, the gift is outside of their estate for IHT purposes. There are then further provisions that can reduce any IHT payable should the individual die within the seven years, such as tapering relief on the rate of tax levied, depending on the value of the gift. This is an effective way for an individual to reduce the size of the estate that is subject to IHT on death. But for how much longer? 

Speculation suggests that two major changes to this rule could be on the cards:

1. an extension to the seven-year timeframe: if an individual had to survive, for example 12 years instead of seven years, it would be increasingly likely a gift made during a lifetime would become subject to IHT, at least on some level.
2. a cap on lifetime gifting: a total cap on the value of gifts that can be made tax-free during an individual’s lifetime may be introduced. The Government would then need to make decisions as to whether tax would be payable during the individual’s lifetime or on their death. 

While it is not yet known what impact the Budget may have on the seven-year rule, it appears unlikely that this long-standing rule will escape the Budget untouched. 

A lesser-known, but potentially powerful, financial planning method is gifting out of surplus income – known to HMRC as ‘Normal Expenditure out of Income’ (NEI). This exemption does not require the donor to survive seven years for the gifts to be made IHT free. To make use of this exemption, a number of requirements must be complied with including, but not limited to, the following:

1. the gift must be out of surplus income without impacting the donor’s standard of living
2. the gift cannot be made from capital (nor can the donor then live off their capital)
3. onerous reporting duties to HMRC to demonstrate the above has been met 

If executed correctly, this can be an effective way for wealthy individuals to gift significant sums to their loved ones over time, without IHT being payable on the gift. This of course has the benefit of reducing the size of the individual’s estate on their death, in turn reducing the IHT payable. Caps on lifetime gifting could cap the effectiveness of this method. 

Following the recent trend of limiting opportunities for individuals to pass down generational wealth free from IHT, rumours suggest little sign of this reversing. 

Effective financial planning has always been complex and it is only getting more so. Many people are anxiously awaiting the changes in the upcoming Budget, but proactive planning and careful use of exemptions can help protect your estate and minimise tax exposure. 

If you’d like to discuss how best to structure your assets and ensure they remain safe for future generations, please contact a member of the team. 

Esther Roberts is an associate in the private client team.