Inheritance Tax Planning – the 7-year rule

Inheritance Tax Planning – the 7-year rule

Over the course of our lives, we all build up property and assets. When we die, once our estate reaches a certain level, it becomes subject to Inheritance Tax (IHT) Inheritance Tax receipts for the 2021/22 financial year exceeded £6bn for the first time. This is an increase of 18% on the previous year and has been driven partly by the freezing of the IHT threshold and partly by the increase in the value of estates, partly driven by record increases in house prices.

All this means that failure to properly plan for the future and to take steps to mitigate the effects of IHT on your estate will cost you dear in the long run.

There are, of course, different reliefs and allowances available to help off-set the impact of IHT. However, taking advantage of these can involve some careful, advance planning.

One of the important elements of IHT relief is the ability to make large gifts which will not attract IHT provided you survive for seven years after making the gift. Popularly known as the 7-year rule, this relief is correctly known as taper relief by HMRC.

How does taper relief work?

Taper relief applies to gifts made by someone who has died in the seven years prior to their death. Before taper relief can be claimed, there are certain criteria that have to be met. One of these is that the value of the gifts must exceed the IHT threshold, currently £325,000. Taper relief only applies to gifts and these are counted first for IHT before the remainder of the estate. The main thrust of this is that if you survive for more than seven years after your death, the gifts do not count towards your estate at all.

What if you die before 7 years have passed?

There are still advantages to be gained even if you do not manage to survive for the entire seven years. A sliding scale is applied which increases the relief the longer you survive after making the gift. The following table sets out the range of relief and rates applicable:

Number of years between date of gift and deathTax due
0 – 3 years40%
3 – 4 years32%
4 – 5 years24%
5 – 6 years16%
6 – 7 years8%
7 years or more0%

The clear message with this is that the earlier you make the gift, the better the chance that you will survive the required seven years.

Using taper relief as part of your Inheritance Tax planning

Clearly tape relief is just one element of IHT planning. There are a number of other options available to help mitigate the impact of Inheritance Tax payable on your estate. However, to take full advantage of the various reliefs and allowances available takes careful planning which starts with drawing up your Will.

If you would like any help or advice in respect of Inheritance Tax mitigation and planning or to discuss making or reviewing your Will, please contact Stacey Parker at 01383 629720 or email Stacey by clicking here.

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