Legal News | 18.05.23

Lucky 7?

Regular readers of our newsletters will know that in recent weeks we’ve been discussing the relevance of the number seven when it comes to Inheritance Tax (IHT). This week, we look at the number seven in the context of gifting and IHT.

Making a gift?

In its simplest terms, a gift is any transfer of value, including but not limited to, cash, investments, property and personal possessions, from one party to another without consideration.

What is the 7-year rule?

Subject to certain exceptions, if you make a gift and survive for the next 7 years, the value of that gift will not be counted as part of your taxable estate, meaning that no IHT will fall due in relation to that gift.

Taper relief and the 7-year rule

Taper relief can be claimed if the total value of gifts made in the seven years prior to your death exceeds £325,000 (the current inheritance tax nil rate band sum).  In this case, the amount of tax referable to those gifts that will be payable on your death will be calculated on a sliding scale, depending upon when you gave that gift.

Taper relief sliding scale

Years between gift and death     Rate of tax on the gift

3 years and death                     40%

3 to 4 years                                32%

4 to 5 years                                24%

5 to 6 years                                16%

6 to 7 years                                8%

7 years or more                         0%

Keeping records

As part of their responsibilities to HMRC, the personal representatives of your estate will need to work out what gifts you made in the 7 years before your death. You should therefore keep the following records:

• A description of the gifted item;
• the recipient of that gift;
• the value of the gift as at the date the gift was given;
• the date upon which the gift was made.

How Inheritance Tax on a gift is paid

The general rule is that the Inheritance Tax that falls due in relation to your estate is the responsibility of your personal representatives and will be paid from your estate.  An exception to this rule is if you have gifted more than £325,000 in the 7 years prior to your death. In this case, and unless you have made alternative provision in your Will, it is the recipients of those gifts who will be responsible for any Inheritance Tax that arises in relation to them.  Of course, the gift recipients may also be the beneficiaries of your estate, and so have access to those funds to pay the IHT.

Gifting and taper relief are complex matters, so if you are considering making any gifts and would like to know more about how taper relief works, please get in touch with your usual contact at Wansbroughs or email us at wealth@wansbroughs.com.