Understanding the seven-year Inheritance Tax rule

With the events of the last year, many individuals’ minds have turned to what could happen when they are no longer around.

Farmers in particular often need to carefully plan ahead as their business and home may have multi-generational ties which need careful succession planning to protect their family’s interests.

Whilst it is understandable that no one wants to think about their own demise, most people are clear that they want their estate to be passed to the next generation with the smallest possible tax burden.

Inheritance Tax is a complicated subject and gifts are a particular source of confusion for many, especially the importance of the seven-year rule.

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, such as for a house deposit, could attract tax should the benefactor die seven years before it was gifted.

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

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.

However, any substantial gifts outside of these rules fall under the seven-year rule. This means that any gifts that do not qualify for relief, exceed your personal threshold, or are made within seven years of your death attract Inheritance Tax on a sliding scale known as taper relief.

For example, if death occurs less than three years after a gift was made, Inheritance Tax is payable at a rate of 40 per cent. At the other end of the scale, if the gift was made six years prior to death, a reduced rate of only 8 per cent is due.

It is also worth bearing in mind that 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.

We know that within farming families there is a strong desire to pass the business, its assets and a wider estate to the next generation.

We are able to provide expert advice on tax-efficient gifting and also estate planning to ensure that your legacy is passed on in the most tax-efficient manner. To find out more, please get in touch.

Posted in ARA.