I've done this video as a much shorter video if you want to get more understanding of this, there is a full 10 minute video, which explains that and it's how the seven year rule works in more detail. However, this is a brief synopsis.

So, what happens is - if you make a gift during your lifetime, and you live seven years and one day, that gift will fall outside of your estate for inheritance tax purposes.

There are two types of gifts:

1. Potentially Exempt Transfer This is a direct gift to somebody and there is no limit to that amount. You could literally if you could afford it give £10 million and that would be a potentially exempt transfer.
We always tell clients be quite careful of this especially if you're gifting money to your children. If they get divorced, half that money gift could potentially walk and therefore gifts into trust are significantly more protected. Each Potentially Exempt Transfer runs separately. So, if you make a gift in year one, another one in year two and another one year three, then if you live seven years past the first gift that falls out of your estate. But then you still have to wait another year for the second one and then another year for the third.
2. Chargeable Lifetime Transfer.
The chargeable lifetime transfer is a gift into a trust. This is significantly more complicated and we won't get into the nitty gritty of it on this video, but effectively if you make a gift into a trust you should not make another gift over your £3,000 allowance within seven years and one day, otherwise it has tax implications.
So the rule is if you made some gifts into a trust, do not make any further gifts in the next seven years. If you do have to and you only do it one year later on you've extended the time period by one year but if you make a gift six years after your gift into a trust, you might well be causing your beneficiary some tax issues that you didn't foresee.