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Inheritance Tax & The 7 Year Rule

In this article we look at the 7 year rule relating to inheritance tax. If you die more than 7 years after you receive the gift there is no tax to pay. If you die less than 7 seven years after you receive the gift, there is a scale of tax to pay known as ‘taper relief’. 

Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died. There’s normally no Inheritance Tax to pay if either:

  • The value of your estate is below the £325,000 threshold
  • You leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.

The taper relief scale

Effectively, if you die within 3 years of receiving the gift you are liable to tax at 40%. Between 3 and 7 years the amount of tax you have to pay is as follows.

Years between gift & death Tax Paid
Less than 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
7 or more 0%

Example reproduced from GOV.UK website

Sally died on 1 July 2018. She was not married or in a civil partnership when she died. Sally left 3 gifts in the 7 years before her death:

  • £300,000 to her brother 6.5 years before her death.
  • £50,000 to her sister 4.5 years before her death.
  • £150,000 to her friend 3.5 years before her death.

Sally is not entitled to any other gift exemptions or reliefs.

There is a £325,000 inheritance tax threshold. Anything below this amount is tax free.

£300,000 is used up by the gift Sally gave her brother. There is no tax to pay on his gift.

The remaining £25,000 is used up by her £50,000 gift to her sister. There’s tax to pay on the amount not covered by the threshold. That means there’s tax to pay on £25,000 of the gift to Sally’s sister at a rate of 24%.

The £150,000 gift given to her friend is taxed at a rate of 32%.

Summary

If you have any further questions about inheritance tax or need advice on how to ensure you are taking advantage of suitable tax efficiencies based on your own circumstances, then get in touch.

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