The number seven is considered the luckiest number in the world, holding significance in cultures, natural phenomena, and spiritual traditions. Furthermore, it also has importance in the UK Inheritance Tax system. Thanks to the 7-year rule, some people are exempt from paying Inheritance Tax on certain assets. While luck may not have much to do with it, we certainly feel lucky when we know that we can say goodbye to Inheritance Tax. Discover what the 7-year rule entails today, and perhaps you could also end up feeling lucky.
The Tax Man versus inheritance
Some people tend to have a significantly negative connotation towards the ‘Tax Man’ in general. The association stems from a long and historic view of unfairness, oppression, and, in some events, corruption. In the UK today, the tax burden has reached a new landmark peak as a percentage of the GDP since the 1940s, according to a report by the Institute for Fiscal Studies.
Now, a heavy burden will rest upon the shoulders of those hoping to leave behind an inheritance, as well as those who will inherit, all thanks to the Inheritance Tax. Typically, an estate worth less than £325,000 is exempt from tax. Estates that exceed this limit will be subject to a steep standard rate of 40% on the additional value. However, there may be a loophole thanks to the 7-year rule.
You don’t pay a penny with the 7-year rule
Every penny counts, and you don’t pay a penny in Inheritance Tax with the 7-year rule. Simply put, you can reduce the value of your estate by gifting your assets to loved ones before death. These assets, or rather gifts, can include the following:
- Houses, land, or buildings
- London Stock Exchange stocks or shares
- Money
- Household or personal items, like antiques or jewellery
- Unlisted shares owned for less than 2 years before one’s death
According to the UK Government’s statement on the Inheritance Tax Rules, to avoid paying Inheritance Tax on the assets mentioned above, the person must live for seven years after giving the gift, with an exception to trusts. In the unfortunate event of death within those seven years, the gift will be subject to tax, and the tax amount will depend on taper relief.
The taper relief scale could make or break you
Whether someone dies within two or three years or more will determine how much Inheritance Tax you end up paying on the gift you received from them. According to taper relief, this is the tax rate you can expect to pay based on the years between gift and death:
- 32% for death after 3 to 4 years of gifting
- 24% for death after 4 to 5 years of gifting
- 16% for death after 5 to 6 years of gifting
- 0% for death after 7 or more years of gifting
Please note that taper relief is only applicable when the total value of gifts is above the £325,000 limit. The UK Government highly recommends that you keep a careful record of the gifts you have given, as this will make the inheritance process much simpler for the person in charge of handling your estate. The following should be on record at all times:
- The precise date of gifting
- The gift’s exact value
- What you gifted and to whom you gifted it
The 7-year rule is a ‘popular’ tax exemption, and can be extremely valuable if all the guidelines are followed. The entire process of inheritance can be nerve-wracking, from estate valuation to determining who inherits what. That is why it is so important to be fully informed of all the rules and regulations regarding estates, inheritance, and Inheritance Tax. Pensioners had no choice but to accept new home ownership rules after the DWP decided to crack down on Inheritance Tax reforms.
Disclaimer: This content is informational only and does not supersede or replace the Department for Work and Pensions’ or HMRC’s own publications and notices. Always verify any specific dates and amounts by following the direct links in our article to the institutions or by consulting your local DWP field office or tax advisor.