Inheritance Tax Gifts: The 7 Year Rule Explained

What is the 7 Year Rule In Inheritance Tax?

If a gift of money or parts of an estate is given to a relative or family member and the gift-giver dies within seven years, the individual in receipt of the gift may be taxed. This is known as the inheritance tax gifts “7-year rule”. Any gift worth over £325,000 is subject to inheritance tax.

How Much Inheritance Tax Will I Pay Under the 7 Year Rule?

The amount of inheritance tax on gifts diminishes the closer to the date of death the gift was received. Here is what a person may be required to pay in taxes depending on the number of years that pass between the date they received the gift and the date the giver died:

For example, if a person was given £500,000 as an inheritance gift four and a half years before the giver died, they would be required to pay £120,000 in inheritance tax on that amount.

If the gift giver’s death is over seven years from the date that the gift was given, the gift will not count towards the value of their estate.

Who Pays Inheritance Tax on Gifts?

Usually, the individual who will have to pay inheritance tax on gifts within 7 years of the death of the gift giver will be a direct descendant, for example, a son or daughter, whether adopted or biologically related or a spouse or civil partner.

Inheritance tax is usually arranged to be paid via a Direct Payment Scheme by the executor of the will of the gift giver if they have made one, or by the administrator of their estate if they have not.

What Gifts Are Exempt from Inheritance Tax?

You can give £3,000 worth of gifts or under to different individuals every tax year (6th April to 5th April), and you can “roll” the amount over to the next year, but only for that one year and no more. This is known as an annual exemption.

Other occasions where gifts are exempt from inheritance tax on gifts within 7 years of death include occasions where you have paid amounts of money to help with another person’s living costs – those of a minor or a disabled or elderly relative, for example – and you can also give tax-free amounts away annually as:

• Wedding or civil partnership presents (up to £1,000 per person, or you can give £2,500 worth of inheritance tax-free gifts to grandchildren or great-grandchildren per year for a wedding or civil ceremony, and £5,000 to any of your children for the same purpose).
• Christmas or birthday presents that are given out of your normal income, as long as giving away those amounts do not prevent you from maintaining your standard of living.
• Gifts to charities or political parties.

You may use multiple exemptions or tax reliefs on the same person in the same year if you wish.

A “gift” can also refer to the difference between the amount for which you sell the property to a relative and the amount it’s actually worth. For example, if you sell a house to your child for a reduced price, the loss of value will be counted as a gift.

If you need any assistance in working out whether there will be any need to pay inheritance tax on gifts to grandchildren, children or other relatives – or if you require any other legal advice relating to tax services, feel free to contact the specialists at DBT & Partners today.