The seven-year inheritance tax rule, explained

Inheritance Tax is a complicated subject. From gifts and trusts to thresholds and reliefs, working out how much tax you might leave behind is no easy feat.

Fortunately, our expert late life planning team is here to support you and answer your most frequently asked questions.

In this blog, we look at everything you need to know about the “seven-year rule”.

What is Inheritance Tax?

Inheritance Tax – abbreviated as IHT – is the levy paid by the executor of an estate of a person who has died.

It is charged at a rate of 40 per cent on the part of the estate that exceeds the Inheritance Tax threshold – currently £325,000 for a single person, or £500,000 if you leave your primary residence to your children or grandchildren.

There’s also no tax to pay on anything left to your spouse, civil partner, a charity or a community amateur sports club.

But you might have to pay tax on any assets gifted in the seven years before your death…

Inheritance Tax and gifts

Whether it’s for Christmas, a wedding, or any other special occasion, small gifts are commonly exchanged throughout a person’s life. But few people are aware that large gifts could attract tax should the benefactor die within seven years of it being gifted.

Under the “annual exemption” rule, you can give away up to £3,000 worth of gifts each tax year (spanning 06 April to 05 April) without them being added to the total value of your estate. Any unused annual exemption can be carried forward, but for one year only.

In addition, you can gift a wedding present of up to £1,000 per person (£2,500 for a grandchild or great-grandchild or £5,000 for a child) without attracting tax, as well as make tax-free traditional gifts, such as Christmas or birthday presents, out of your income, providing you can still maintain your standard of living.

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

Any gifts outside of these rules fall under the “seven-year rule”.

How the “seven-year rule” works

Gifts that do not qualify for relief, exceed your personal threshold, and are made seven years prior to your death attract Inheritance Tax on a sliding scale known as taper relief. This is illustrated below:

Years between gift and death Tax paid
less than 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
7 or more 0%

 

For example, a gift made two years before your death will attract the full 40 per cent rate of tax. A gift made between five and six years before your death will attract a reduced rate of 16 per cent, while any gifts made after seven years are not counted towards the value of your estate.

It is important to note that Inheritance Tax is only payable on death, meaning any large gift should be given with the caveat that tax may be due in the future.

Potentially exempt gifts which have become chargeable should be reported to HM Revenue & Customs (HMRC) by the executor.

Chargeable lifetime gifts

Some gifts to certain trusts, companies and close companies may be considered “chargeable lifetime gifts”. This means 20 per cent is payable immediately, with an extra 20 per cent payable if you die within seven years of making the gift.

Get expert advice today

For help and advice with related matters, please get in touch with Natalie Payne, Head of Wills and Estate Administration at Mackrell.Solicitors on +44 (0) 207 240 0521 or at Natalie.Payne@mackrell.com

 

 

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Natalie Payne

Natalie Payne

Senior Associate Solicitor, London, Head of Private Client, Wills and Probate Team at Mackrell.Solicitors
Natalie is a Private Client Solicitor at Mackrell.Solicitors and is based in their London office. Natalie has a very hands on approach with her clients and guides them through every step when looking after their personal affairs and/or those of their friends and family.