As we grow older, we start to become aware of the harsh realities of adult life, particularly when it comes to inheritance. It is vital, as it provides financial security to loved ones someday, but the extremely high tax rate is resulting in some to reconsider. However, an Inheritance Tax Rule, more particularly the 7-year rule, means you don’t have to pay a penny. Understanding the particulars of this rule could alleviate future burdens on your loved ones. Now, this rule is being targeted, and we may have to say goodbye.
Inheritance Tax in the UK is extremely high
The UK has some of the highest Inheritance Tax rates in the world. In fact, it is currently among the top ten highest in the world, according to a report by the Tax Foundation. As a rule of thumb, an individual with an estate more than the nil-rate (tax threshold) of £325,000 will have to pay a 40% Inheritance Tax rate, should the individual unfortunately pass away.
According to MP Estate Planning, some factors are major contributors to this extremely high Inheritance Tax rate. Two primary contributing factors are increasing property values and wealth inequality. Simply put, the property market rises, resulting in a higher number of estates included in Inheritance Tax. Thankfully, there is one Inheritance Tax Rule that could alleviate the burdens of the high tax rate, but we may have to say goodbye to this rule very soon.
The 7-year Inheritance Tax Rule
One of the more favourable ‘exemptions’ of Inheritance Tax is the 7-year gifting rule. According to a report by The Private Office, you are allowed to gift a loved one with tax-free assets as long as you live 7 years after giving the gift.
The following gifts will be exempt from Inheritance Tax:
- Gifts to spouses or partners
- Any gift to a UK-domiciled spouse/civil partner
- Some gifts to a non-UK domiciled spouse/civil partner
- Gifts from income
- As long as it doesn’t impact normal living standards
- Wedding gifts
- Up to £5,000 for a child
- £2,500 for a grandchild/great-grandchild
- £1,000 to anyone else
- Gifts to family for maintenance assistance
- Gifts that assist with living expenses
- Gifts to political parties
- Exempt when, at the last general election before death, the party had at least two MPs elected to the House of Commons, or had one MP elected and the party received at least 150,000 votes in total
- Gifts to charities
- Gifts to charities, museums, universities, and community sports clubs
Now, you may have to say goodbye to sending family money with this 7-year gifting rule.
Goodbye to sending family money
The 7-year rule intends to prevent Britons from giving away substantial amounts on their deathbed to avoid paying Inheritance Tax. However, Chancellor Rachel Reeves has set her sights on this Inheritance Tax Rule, and has plans to make gifting rules stricter during an individual’s lifetime, according to MoneyWeek. Now, pensioners and their pensions may also no longer be exempt.
Waiting until it is too late to get all your ducks in a row is not recommended. Yes, planning for the future may seem like a daunting process, but increasing your understanding of Inheritance Tax will make planning for the future easier for you and your loved ones. With the additional upcoming changes to Inheritance Tax, perhaps getting your estate plans in order now is as good a time as any. For more information, please have a look at the UK Government’s statement on the Inheritance Tax Rule.
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.