What are the current inheritance tax thresholds?
Inheritance tax (IHT) is a tax on the estate (the property, money and precessions) of a person who dies. There is normally no inheritance tax to pay due to the current rules. Estates less than the value of £325,000 are not liable to pay any IHT on the transfer of assets on death. This allowance can be increased in certain circumstances.
If your estate is worth less than £2 million you can qualify for Residence Nil Rate Band (RNRB) which gives you a further £175,000 of allowance on top of the £325,000 Inheritance tax allowance. If you own your own home (or share it) and leave it to your children (including adopted, foster or stepchildren) or grandchildren.
What is the 7-year rule?
In the UK you are normally free to gift anything from your estate (as long as it is not part of a trust) without paying any kind of inheritance tax, as long as you live for at least 7 years after giving it to them.
If you do die within these 7 years after giving a gift, the person receiving the gift is required to pay Inheritance Tax on this.
How does the 7-year rule help me?
There are specific rules regarding the liability to Inheritance Tax (IHT) on gifts made during a person's lifetime. In most cases, gifts made during a person’s life are not taxed at the time they are given.
These lifetime gifts are referred to as "potentially exempt transfers" (PETs). The gift becomes exempt from IHT if the giver survives for more than seven years after making the transfer, commonly referred to as the seven-year rule. There were expectations that this rule might have been changed as part of the Budget measures, but no changes were made.
How does the 7-year rule tapering work?
The 7-year rule has a tapering system in place, if the giver dies within three years of making the gift, the IHT treatment is as if the gift was made upon death and it will be fully chargeable in the estate. If death occurs between three and seven years after the gift, a tapered relief applies.
The IHT rates on the amount exceeding the IHT nil-rate band are as follows:
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0 to 3 years before death: 40%
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3 to 4 years before death: 32%
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4 to 5 years before death: 24%
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5 to 6 years before death: 16%
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6 to 7 years before death: 8%
What if I continue to Benefit from my asset?
If you give away an asset but continue to benefit from it, this is considered a “gift with reservation,” and the value of the asset will still count towards your estate. Examples of gifts with reservation include:
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Giving your home to a relative but continuing to live in the gifted property.
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Giving away a caravan but still using it for holidays without charge.
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Donating a valuable painting but still displaying it in your home.
Secure Your Estate with Expert Guidance
The 7-year rule plays a crucial role in inheritance tax planning. Our specialist tax team is here to provide expert guidance tailored to your circumstances. Contact us today to ensure your estate is structured effectively and your goals are achieved.