Inheritance tax: Seven year rule explained – how to reduce bill | Personal Finance | Finance

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As the inheritance tax (IHT) threshold is to continue to be frozen at £325,000 until 2028, more Britons are being dragged into the tax net, and forced to pay thousands. IHT receipts from April to November 2022 were £4.8billion, an increase of £0.6billion compared to the same period a year earlier.

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.

Gifting is a great way to lower one’s IHT bill however there are rules which can leave people paying more.

Shaun Robson, head of wealth planning at Killik & Co., spoke exclusively with Express.co.uk about the importance of the seven year rule.

The seven-year rule applies to any gifts that are above an individual’s annual gifting allowance.  

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This is usually £3,000, although if unused it can roll over once, giving them a £6,000 limit. 

For IHT purposes, gifts over these allowances are known as potentially exempt transfers. 

If a person lives for at least seven years after making a potentially exempt transfer (PET), the transfer is considered to be exempt from inheritance tax (IHT).

This means that the recipient of the assets will not have to pay any inheritance tax on them. However, if the person makes a PET and dies within seven years, it may be subject to inheritance tax.

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He said: “If the total value of the estate – or combined estate of yourself and your spouse (or civil partner) is over the tax-free threshold, the next step is to consider planning to reduce the tax liability and/or provide for its payment.

“One way to do this is to make larger gifts now to your beneficiaries directly, where it is affordable to do so, and survive such gifts by seven years meaning they should be excluded from inheritance tax calculation on death. 

“Where you are making the gift directly to another individual, there is no upper limit on the size of the gift.

“It is a great way to make larger gifts to beneficiaries where the smaller IHT exemptions are not sufficient and means these gifts can be enjoyed during your own lifetime, rather than on death, whilst also reducing the potential Inheritance tax charge.”

Most people’s estates will be subject to inheritance tax upon death, which is why planning ahead to mitigate this as much as possible makes sense for everyone.

As well as considering the seven year rule, there are many allowances on offer which can make “a big impact”.

He stressed the importance of thinking about the implications any gifting or bequeathing may have, particularly with freezes on some allowances and the reduction of others.

If IHT is a big worry, Britons may wish to give their family gifts during their lifetime rather than leaving it all in their will.

Not only does it have tax benefits, it also means people get to see them enjoy their gifts while you’re still around.

People get a gift allowance of £3,000 each year that falls out of their estate immediately for inheritance tax purposes.

They can also make small gifts of up to £250, specific gifts for family weddings and unlimited regular gifts from income. 

Estate planning can be an incredibly complicated area to navigate so speaking to an advisor will help to ensure people are mitigating any potential implications.



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