The seven-year rule is designed to encourage people to make gifts or transfer assets during their lifetime, rather than waiting until they die and potentially incurring a larger tax liability for loved ones.
Britons are often told by experts that they will have to take action if they want to avoid leaving their loved ones with a hefty bill when they pass away.
Gifting is a great way to lower one’s IHT bill however there are rules which can leave people paying more.
To cut one’s bill to potentially zero, they can follow the seven-year rule when gifting.
Many people are unaware of this and are confused when they are left to pay tax on a gifted asset.
An expert has explained it is an unpopular form of taxation in the UK because people are potentially paying tax for a second time on assets (money and possessions) that were taxed.
Current rules mean that typically each family will pay 40 percent tax on all assets inherited over £325,000.
The only exception to this rule is the family home. If it’s left to a direct descendent (children, grandchildren, or spouse/civil partner) the tax-free allowance can be increased by £175,000 to £500,000.
Tom Biggs at Wellers explained to minimise the Inheritance Tax the family will have to pay, people can either reduce the size of their estate or increase their tax-free allowance.
Of the two, reducing the size of one’s estate subject to inheritance tax may be the easiest, and can be achieved through ‘gifting’ assets.
Mr Biggs said: “Gifting assets to a spouse/civil partner or charities is instantly tax-free. You can gift up to £3,000 per tax year to anyone in one go, and as many gifts of up to £250 as you like. There are also special allowances if your children or grandchildren are getting married.
“One thing to remember is the 7-year rule for gifting assets. If you survive seven years after gifting, Inheritance Tax typically shouldn’t apply.
Inheritance tax warning over ‘misleading’ form after person overpays by £30k[LATEST]
Hunt warned scrapping inheritance tax will force struggling Brits to plug gap[INSIGHT]
Jeremy Hunt blasted on BBC with Tory tax rebellion growing[ANALYSIS]
- Advert-free experience without interruptions.
- Rocket-fast speedy loading pages.
- Exclusive & Unlimited access to all our content.
“However, tax rules can be intricate, and other taxes such as a capital gains tax can be a consideration, which makes it important to consult a tax advisor for strategies and guidance specific to your personal circumstances.”
For IHT purposes, gifts over these allowances are known as potentially exempt transfers.
If a person lives for at least seven years after making a potentially exempt transfer (PET), the transfer is considered to be exempt from inheritance tax (IHT).
This means that the recipient of the assets will not have to pay any inheritance tax on them. However, if the person makes a PET and dies within seven years, it may be subject to inheritance tax.
If a person doesn’t survive the gift by seven years, the PET becomes a Chargeable Consideration, and is added to the value of the estate for IHT. If the combined value is more than the IHT threshold, IHT may be due.
The tax burden falls from 40 to 32 percent if someone lives for three years after making a gift, and from 32 to 24 percent if they survive for four years.
If the person dies between five to six years after the gift it will be taxed at 16 percent and between six to seven years it will be taxed at eight percent.
Claire Ellis, IHT manager with TaxAssist Tax Consulting said: “Month by month, we are seeing more families being hit with an IHT liability. The combination of asset price inflation and frozen allowance thresholds saw IHT receipts for April 2023 to August 2023 climb to an eye watering £3.2 billion, which is £0.3 billion higher than in the same period a year earlier.
“Given that IHT can erode family wealth, it is important to consider taking action to protect your loved ones, in the event of your death.”
Source: Read Full Article