Considering the rule of seven when making financial gifts

How much of your estate will go towards an Inheritance Tax bill?

Whether or not you have started planning yet, you may want to consider the seven-year rule, whenever you intend to make financial gifts. It could help reduce an Inheritance Tax (IHT) bill down the road.

Knowing the seven-year rule

When you consider making gifts to individuals that aren’t instantly exempt from Inheritance Tax, they are called potentially exempt transfers or PET. Basically this means they will only be completely tax-free if you survive for at least seven years, following making the gift. If you die within seven years, the gift may still be subject to IHT. This is known as the seven-year rule.

Each person has a nil band rate (which is currently £325,000). This is the total of your estate which can be past to your beneficiaries without paying IHT. You may pay IHT on anything above this threshold. If you die within 7 years of making the gift then this will be included in your threshold.

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Key points to note:

  • Anything you gift seven or more years before you pass away is likely to be exempt from IHT. As long as it is gifted to individuals and not businesses or trusts.
  • Should you pass on before the seven years is up, the gift is included in your estate, but with a reduced tax rate if it’s been three or more years since you gifted it.
  • If you continue to benefit from a gift (such as living rent-free in a home), then it won’t be exempt.

Exempted gifts

You are able to give £3,000 worth of gifts every tax year. This amount can be rolled over to the following year, but only for that year. This is not added to the value of your estate and is known as an annual exemption.

You can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.

You can also give tax-free amounts away annually as:

  • Wedding or civil partnership presents up to £1,000 per person;
  • £2,500 worth of inheritance tax-free gifts to grandchildren or great-grandchildren per year for a wedding or civil ceremony; £5,000 to any of your children for the same purpose;
  • Gifts to charities or political parties;
  • You can also make gifts out of normal income. So long as the gift does not affect your normal standard of living.
  • Occasions where you have help with another person’s living costs, such as an elderly relative or a child under 18.

You can use one or more of these exemptions on the same person. And there’s also no Inheritance Tax to pay on gifts between spouses or civil partners (provided they live in the UK permanently).

It’s important to note that a gift can refer to the difference between the amount for which you sell a property to a relative, and the amount it’s actually worth. As an example, if you sell a house to your child at a price that’s lower than the market value. The loss of value will be counted as a gift.

Speak to one of our team about your IHT queries.

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What is taper relief?

Most lifetime gifts are PET, which as long as the giver lives for seven years or more from the date of the gift it will become fully exempt at this time. However, if they don’t live for the full seven years, taper relief will be applied. This means that if you survive for at least 3 years after gifting the gift, then the tax payable will be applied on a sliding scale, decreasing the longer the number of years you have survived.

So as you can see from the table, the earlier you make these gifts, the better. Especially if you'd like to make larger gifts, it's a good idea to make plans as soon as possible.

Just bear in mind that, if you do make a large gift and live at least seven more years, this approach will only take the gift itself out of your estate. You might still have a liability, if the rest of your estate is above your personal nil rate band.

Period of years before death % Reduction (Taper Relief Tax payable on gifts above Nil Rate Band
0 - 3 years Nil 40%
3 - 4 years 20% 32%
4 - 5 years 40% 24%
5 - 6 years 60% 16%
6 - 7 years 80% 8%
More than 7 years No tax 0%

Looking at your estate as a whole

You may find that along with any properties you own, you have other assets too. It’s important to be thorough, as they may actually help to reduce your liability down the line.

Due to the complexities, it could be worth thinking about speaking to one of our financial advisers to look at your entire estate and your potential options. An adviser could help you calculate the value of your estate, to see if you are likely to have an inheritance tax liability and we will provide recommendations on how you could put plans in place to address this.

There's no fee for the initial consultation, and no pressure to act on the advice given. You will only be charged if you decide to implement a recommendation and the charges will be fully explained to you.

There are lots of options available to reduce a potential tax bill, but the options available could reduce the longer you wait and older you get. By starting to make plans earlier, you could put plans in place to reduce any liability and leave more for your loved ones to receive more when the time comes.

Important information

Please remember that inheritance tax planning solutions may put your capital at risk so you may get back less than you originally invested. Inheritance tax thresholds depend on your individual circumstances and may change in the future. Some areas of inheritance tax planning are not regulated by the Financial Conduct Authority.

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