Inheritance tax: How you could ensure gifts are free from tax – 7 year rule explained

Inheritance tax: Expert provides tips on avoiding hefty bill

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As the inheritance tax threshold is to continue to be frozen at £325,000 until 2026, more and more people are expected to be dragged into paying the “death tax”. Inheritance tax is paid on the estate of someone who has died and currently it is paid at a rate of 40 percent on anything above the threshold, known as the nil rate band, although there are ways to increase this threshold. The value of an estate includes a person’s property, money and possessions.

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. 

The usual recommendation is to gift whilst a person is still alive. 

According to the rules, all adults can give away a maximum of £3,000 every year without paying tax on it. This is known as a person’s “annual exemption”.

The £3,000 can be to one person or be split between several.

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People are also able to carry over their unused annual exemption to the next tax year however this is only for one tax year.

Couples can combine their allowances meaning they can give away £6,000 without paying tax.

People can give as many gifts of up to £250 per person as they want each tax year, as long as they have not benefited from the £3,000 limit.

Birthday and Christmas gifts which are given from a person’s regular income are exempt from inheritance tax.

Parents can gift £5,000 if their child is getting married, £2,500 to a grandchild or great-grandchild on marriage, and £1,000 to another relative or friend.

With gifting, Britons will need to be aware of the seven-year rule.

No tax is due on any gifts if a person lives for seven years after giving them, however, if the person dies within the seven years there is a tax to pay.

Anything given three to seven years before the death is then taxed on a sliding scale known as ‘taper relief’.

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Between three to four years, the gifts will be taxed at a rate of 32 percent and between four to five years, it will be taxed at 24 percent.

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.

Britons are also warned about “gifts with reservation”. 

A gift with reservation is where a person makes a gifts but “reserves a benefit”. 

If something is classed as a gift with reservation then it will be included in the value of a person’s estate and tax will be paid on it regardless of how long someone lives after the gift is given. 

An example of this is if a person gives away their property to their children but continues to live in it, without paying market rent. 

If Britons are gifting, they are recommended to keep a detailed record of what has been given away. 

This includes a record of what was given and whom it was given to, the value of the gift, and the date it was given.

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