What is the seven-year rule in inheritance tax (IHT)?

Now more than ever people are finding themselves incurring an Inheritance Tax (IHT) liability after the passing of a loved one.

IHT is a tax of 40% on the estate of someone who has died. IHT only occurs where the value of the estate exceeds the Nil Rate Band (NRB), which is £325,000. An estate consists of a person’s property, money and any other possessions at the time of death (even assets like ISAs are included and could be subject to inheritance tax). It is therefore essential to adopt careful tax planning.

Are there any restrictions to gifting assets in order to minimise my IHT bill?

Gifting assets while alive is one of the most common practices in minimising an IHT bill, such as gifting a property to a child. However, when gifting assets it is important to understand the implications of the ‘seven-year rule’ as it may influence the timings of your financial planning.

There are several gift allowances and exemptions that you can make during your lifetime or at death that are wholly exempt from IHT.

Each tax year, you can transfer:

• Small gifts to individuals of £250 or less per donee.
• Wedding gifts or civil ceremony gifts to a bride or groom up to:
  • £5,000 from a parent
  • £2,500 from a grandparent or great-grandparent
  • £2,500 between bride and groom or between civil partners
  • £1,000 from any other person
• £3,000 on any other gifts after these exemptions in that tax year.
• A gift of any value to a charity or political party.

What is the 7-year rule in inheritance tax?

Beyond the exemptions listed above, gifts may also qualify as a ‘potentially exempt transfer’ (PET). This means gifts of any value will not be included in the donor’s estate and will be exempt from IHT, as long as, the donor survives seven years after the date of transfer and does not derive any further benefit from the gift. This is known as the seven-year rule.

Are there any reliefs for gifts made within seven years of the date of death?

Potentially exempt transfers that were made within the seven years prior to death will be subject to IHT, however, the amount of tax due may be reduced by taper relief. The amount reduced will depend upon the number of years which have elapsed between the transfer date and the date of death.

Taper relief is as below:

Need further advice?

If you are considering the size of your estate and potential exposure to IHT then please do not hesitate to contact our specialist team for Inheritance Tax and Estate Planning advice.