Inheritance Tax and the 7 Year Rule on Gifts

Posted by David Cammack on 25th April 2019

Inheritance tax planning

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Figures out yesterday from the Government show that the tax being received by HM Treasury from Inheritance Tax is at an all time high, including when compared to GDP. This is also despite the additional allowance (the “residential nil rate band“, which is presently up to £150,000 for an individual, so long as your estate is not over £2 million) when you pass the family home to your children or grandchildren, which was introduced in April 2017. However, Inheritance Tax is still a voluntary tax. If you plan correctly your estate, then you may not be liable to pay any. A seemingly-easy way to reduce the burden of inheritance tax on your estate is to give away part of your estate before you die.

The theory is that if you survive for a further 7 years, then the gift no longer counts as part of your estate. It becomes entirely tax-free. You can then use the whole of your tax-free exemption for the retained balance of your estate. This exemption is either £325,000 or £475,000 for an individual.

If you don’t survive 7 years, then there are two problems:

  1. Firstly, the gift is subject to Inheritance Tax, but “on a sliding scale”. The older the gift is, the lower the applicable Inheritance Tax rate is; and
  2. Secondly, it uses up your Inheritance Tax allowance before the rest of your estate.

So far this actually sounds OK. However, see what you think by the end of this article. Here’s what HMRC say about the way this works with a “helpful” example:

HMRC’s Example of the Inheritance Tax 7 Year Rule *

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Inheritance Tax and the 7 Year Rule

So the implication of making a gift that is nearly 7 years old, but not quite, is that:

  • On the face of it, the old gift should be subject to a rate of 8% if between 6 and 7 years old by the date of death,
  • But it in fact eats up your nil rate band first. So it eats that up as if it were liable to the full 40% rate.

You see the problem now? Do you still think it sounds fair?

Inheritance Tax and the 7 Year Rule imageHelp, I need Inheritance Tax planning advice?

If, having read this article, you think that you might need help on issues such as these, Legalo will be happy to put you in touch with experienced and recommended solicitors. They can advise you on how to sort it all out with minimal fuss. Just get in touch with us through our Find A Solicitor service, for a fast, free, no-obligation quote.

* Excerpt taken from: https://www.gov.uk/inheritance-tax/gifts. Copyright HMRC.