Upgrade to Chrome Upgrade to Firefox Upgrade to Internet Explorer Upgrade to Safari
Legal News | 1.07.21

The magic number 7 – why it matters for estate planning

If you are looking for ways to reduce the amount of inheritance tax (“IHT”) payable on your death, then you might want to consider lowering the value of your estate by making lifetime gifts.

Certain gifts, such as those made to a spouse or civil partner or gifts made out of excess income, are exempt from IHT. You are also able to give away up to £3,000 (cash or assets to that value) in each tax year without incurring any IHT consequences (this can rise to £6,000 as you are able to carry over any unused amount from one previous tax year).

Another class of gifts exists – those that may or may not be subject to IHT depending upon whether or not you survive for 7 or more years from the date of making the gift. These gifts are known as potentially exempt transfers (“PETs”). If you survive for 7 years after making a PET it will become exempt and there will be no IHT considerations for your estate. However, if you die within 7 years of making a PET it will be taken into account when calculating the IHT due from your estate.

If the total value of PETs made in the 7 years prior to your death is within your available nil rate band (a full nil rate band currently being £325,000), then there will be no IHT to pay on these gifts. However, these PETs will ‘use up’ the equivalent amount of your nil rate band, resulting in less of your nil rate band being available to offset against the remainder of your estate. Additional consideration must also be given if any gifts have been made into trust.

If the total value of PETs made within 7 years of your death is in excess of the value of your available nil rate band, then IHT will become payable on the amount by which gifts exceed the nil rate band. The rate at which inheritance tax is paid reduces on a sliding scale depending upon how long ago the gifts were made, known as taper relief.

If you would like to discuss lifetime gifting and estate planning please get in touch with your usual Wansbroughs contact or email the Private Client team at wealth@wansbroughs.com.


Posted By Our Wills, Tax, Trusts & Probate Team