Considering the rule of seven when making financial gifts

If you think you might be affected by inheritance tax, it can be tempting to hold off making plans to do anything about it.

We get it. And we wish we could say that putting it off will work out in the end for you. But the truth is that it’s better to plan earlier for inheritance tax. Current thresholds are frozen until at least 2026, so it’s likely more estates will trigger a 40% bill over the coming years.

It doesn’t have to be that way for you and your loved ones. There are many ways you might be able to reduce (or even eliminate) a potential liability. But the longer you wait, the more expensive some of these options might prove.

Gifting to address inheritance tax

We won’t go through all the options with you now – our financial advice team are here to do that for you. But we do want to talk about one of the most popular, and cost-effective, inheritance tax options.

It all relates to gifting bits of your wealth to loved ones before you die. The idea being that the people who matter to you most could start to benefit from some form of inheritance earlier. It also reduces the value of your estate. Meaning, when it’s assessed for inheritance tax, your potential liability could prove lower. Or, even better, you don’t have one at all.

Introducing the rule of seven

In order for bigger financial gifts to be fully exempt from inheritance tax, you need to live for at least seven more years.

Here's how it works;

  • If you die within seven years of making the gift, every penny is still considered part of your estate and it will be included in your inheritance tax assessment. In other words, it’s like you never gave the gift in the first place.
  • If you die between three and seven years, you would still have to pay some tax on the gift if it exceeded the available nil rate band. The amount payable on the gift goes down each year, as the table below shows.
  • Only after seven years is the full gift no longer part of your estate for tax purposes.
Period of years before death % Reduction (Taper Relief)
0 - 3 years Nil
3 - 4 years 20%
4 - 5 years 40%
5 - 6 years 60%
6 - 7 years 80%
More than 7 years No tax

It goes without saying that none of us know when our time will come.

That’s why it can really help to start making plans now. Doing so could help you maximise the amount of inheritance you leave to loved ones.

What if I don’t want to gift parts of my estate early?

That’s a great question. The truth is a lot of people feel this way for very good, personal reasons.

But that still doesn’t mean you should put off making plans. There are other, useful options to consider. And some of these become more expensive, the longer you wait to take them up.

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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