How Potentially Exempt Transfers really interact with the nil-rate band, why taper relief rarely helps gifts under £325,000, and the exemptions that work immediately — including the underused surplus-income rule.
Give money to a person and it's a Potentially Exempt Transfer: survive seven years and it leaves your estate entirely. Die sooner and it comes back into the inheritance-tax calculation — but not in the way most people picture.
The rule everyone half-knows is taper relief: from year three, the tax on a gift drops by 20%, 40%, 60%, then 80%. The rule almost nobody knows is the ordering: gifts consume your £325,000 nil-rate band before the rest of the estate touches it. A £100,000 gift made two years before death carries no tax of its own — it fits inside the band — so there is nothing for taper relief to reduce. What actually happens is the estate loses £100,000 of band and pays 40% on £100,000 more. Taper relief only genuinely bites once total gifting within seven years exceeds the available band.
The first £3,000 given each tax year never enters the clock at all, small gifts of up to £250 per person are free, and wedding gifts have their own limits. The underused one is regular gifts out of surplus income: genuinely paid from income, part of a pattern, leaving your standard of living intact — immediately exempt, with no upper limit. For wealthy retirees with more pension income than spending, it beats the 7-year game entirely (keep records; your executors will need them).
Hundred Summers' 7-year rule calculator shows what a specific gift does to your bill by running the app's real IHT engine with and without it, and the full plan advances every gift's clock year by year through your projection.