If you are thinking of sharing your wealth with family members during your lifetime, it is important to be aware of the seven-year rule for Inheritance Tax.
If you are thinking of sharing your wealth with family members during your lifetime, it is important to be aware of the seven-year rule for Inheritance Tax. Here, we explain what this rule is, and how it can impact gifting assets or money to loved ones.
The rule broadly applies to potentially exempt transfers (also known as PETs) which are given to individuals. Surviving for seven years after making a gift means that it is not usually included in your estate when it comes to Inheritance Tax. However, gifts into different kinds of trust fall within different conditions and follow different rules.
What does the seven-year rule actually mean?
Surviving for seven years after having given a PET means that the person who has received it does not have to pay Inheritance Tax. If your life ends within that seven-year timeframe, then the gift may incur charges. These charges are dependent on how much you have given and are decided within the context of other gifts.
Gifts are considered in chronological order which means that earlier transfers can make use of a portion of or your nil-rate band in its entirety before a gift that is given later is factored in. The nil-rate band at the current time is £325,000, though this can be affected by previous transfers.
Taper relief explained
It is commonly believed that taper relief means that every gift decreases in value after three years. However, this is incorrect. Taper relief reduces the tax on a gift only when cumulative chargeable gifts are in excess of the nil-rate band.
Tax treatment depends on individual circumstances and may be subject to change in the future.
Exemptions from Inheritance Tax
The annual exemption inheritance tax stipulations mean that you can give up to a maximum of £3,000 during a tax year, provided conditions have been met.
It is also possible to take advantage of the small gifts exemption inheritance tax allowance. This incorporates gifts of up to £250 for individuals. There are other exemptions that can be used for gifts given for weddings or civil partnerships, birthdays or for Christmas. These are considered gifts out of income inheritance tax.
A further exemption worth considering is regular gifts that can be included in normal expenditure out of income inheritance tax. These can be exempt when they are part of your usual spending, are derived from income and leave you with enough income to maintain your normal standard of living.
Conditions related to gifts
The seven-year rule does not apply to gifts that offer continuous benefits. For example, if you give your home to a family member but continue to live there rent-free, this can be considered a gift with reservation of benefit. This means that the property can still be considered as part of your estate on your death. Keeping detailed records of valuations and all other transactions is vital for ensuring that executors have a clear picture for decision making.
You can get bespoke advice on the seven-year rule and more with our Inheritance Tax service.
