There's a simple idea at the heart of inheritance tax planning that most people have heard of but few truly understand: if you give something away and survive for seven years, it's no longer part of your estate.
That's it. That's the rule. But as with most things in tax, the detail matters. And if you own shares in a property company, understanding exactly how this works could save your family a very large sum of money.
What is a potentially exempt transfer?
When you give something away during your lifetime — shares, cash, property — it's known as a potentially exempt transfer, or PET. The "potentially" is doing a lot of heavy lifting in that phrase.
Here's what it means: the gift is potentially free from inheritance tax, but only if you survive for seven years after making it. If you do, the gift drops out of your estate completely. HMRC can't touch it.
If you don't survive the full seven years, the gift gets pulled back into your estate and taxed as if you still owned it — though there is some relief available, which we'll get to in a moment.
The clock starts ticking on the date you make the gift. Not the date it's received, not the date it's registered — the date you give it away.
The taper relief table
If you make a gift and pass away within seven years, the gift is brought back into your estate. But after the first three years, the tax rate reduces gradually. This is called taper relief.
Here's how it works:
| Years between gift and death | IHT rate on the gift |
|---|---|
| 0 to 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7+ years | 0% |
An important detail: taper relief only reduces the tax rate, not the value of the gift. And it only applies when the gift, combined with previous gifts, exceeds the nil rate band (currently £325,000). So it's most relevant for larger transfers — exactly the kind property company owners tend to make.
Gift with reservation — the rule you can't ignore
This is where people sometimes come unstuck. HMRC has a rule called gift with reservation of benefit, and it's designed to catch one specific behaviour: giving something away on paper while continuing to benefit from it in practice.
The logic is straightforward. If you give your property company shares to your children but continue to receive all the dividends, live rent-free in one of the company's properties, or make all the management decisions as if nothing has changed — then HMRC says you haven't really given anything away. The shares stay in your estate regardless of how many years pass.
For the gift to be effective, you genuinely have to let go. That doesn't mean you can't remain a director, or that your children can't pay you a fair market salary for managing the properties. But the economic benefit of the shares has to shift to the new owner.
The golden rule: You can't have your cake and eat it. If you gift shares but keep all the benefits, the 7-year clock never starts. The gift must be real, not just on paper.
How this applies to property company shares
Property company shares are particularly well-suited to the 7-year rule, but they also need careful handling.
Unlike gifting a physical property (which can trigger stamp duty land tax and capital gains tax), gifting shares in a company is a transfer of the shares themselves. There's generally no stamp duty on a gift of shares for no consideration. Capital gains tax may arise, but there are reliefs available — particularly holdover relief for certain types of gifts — that can defer or eliminate the CGT charge.
The important thing is that once the shares are gifted, the recipient owns them. They're entitled to dividends declared on those shares. They benefit from any increase in the company's value. And if the person who made the gift survives seven years, those shares — and all their growth — are completely outside the estate.
But here's where the reservation of benefit rules bite hardest with property companies. If Dad gifts shares to his daughter but continues taking all the dividends, or if Mum gifts shares but keeps living in a company-owned flat without paying rent, HMRC will argue the gift wasn't genuine. The structure has to reflect reality.
The insurance option
Seven years is a long time. And there's an obvious risk: what happens if the person who makes the gift doesn't survive the full period?
One common solution is to take out a term life insurance policy written in trust, specifically to cover the potential IHT bill during the seven-year window. The policy pays out if the donor dies within seven years, providing the family with the funds to pay any inheritance tax that becomes due.
The policy is typically written on a decreasing basis — the cover reduces over time, mirroring the taper relief table. So in years one to three, the cover is highest (matching the full 40% rate), and it reduces each year after that until it reaches zero at year seven.
Because the policy is written in trust, the payout goes directly to the beneficiaries without forming part of anyone's estate. It's a clean, practical safety net.
Martin, aged 62, owns 100% of a property company worth £1.8 million. After restructuring, he gifts shares worth £800,000 to his two children (£400,000 each). The remaining shares — carrying voting rights and a fixed income — stay with Martin.
At the point of gifting, Martin takes out a 7-year decreasing term life insurance policy written in trust. The initial cover is £320,000 (40% of £800,000), reducing each year in line with taper relief.
The policy costs Martin a monthly premium — a fraction of the potential tax saving. Three years after the gift, the taper relief begins. After seven years, the £800,000 is completely outside Martin's estate.
Without the gift: £800,000 in the estate = up to £320,000 IHT for the family.
With the gift (after 7 years): £0 IHT on those shares. The insurance covers the risk in the meantime.
Why starting sooner matters
The 7-year rule rewards people who act early. Every year you wait is a year the clock isn't running.
If you're 60 and gift shares today, you'll be 67 when they leave your estate. Wait until you're 68 and you'll be 75 before the same result. And of course, the older you are when you start, the higher the insurance premiums — and the greater the risk that health issues make cover unavailable altogether.
There's also the question of growth. A property company that's worth £1 million today might be worth £1.5 million in ten years. If you gift shares now, all that future growth belongs to your children from day one. Wait, and you're transferring a larger amount — which means a bigger IHT exposure during the seven-year window.
The maths always favours starting sooner. Not rushing — but not putting it off, either.
The bigger picture
The 7-year rule is one piece of a larger puzzle. On its own, it's powerful. Combined with the right share structure, the right valuation approach, and the right insurance arrangements, it becomes the foundation of a genuinely effective IHT strategy.
But it only works if you take the first step. And that first step is understanding what your exposure actually looks like today.
Ready to start the clock?
We can help you understand your options for gifting shares and reducing your IHT exposure. A short conversation is all it takes to see where you stand.
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