Could the IHT seven-year rule on gifts be cut to five?
IHT has been named Britain’s ‘most-hated tax’, and as we write this the standard Inheritance Tax rate is 40%. The tax is only charged on the part of your estate that’s above the threshold.
So for example,
If your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).
If there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the 3 years before you die.
Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.
Years between gift and death Tax paid
< 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
7 or more 0%
At present, when someone dies within seven years of passing on money, property or possessions to loved ones, tax of up to 40 per cent must be paid.
However, the Office of Tax Simplification (OTS) has recently suggested that this deadline should change to five years.
According to an official review ordered by the chancellor, the seven-year rule on gift-giving should be cut to five years, meaning gifts made more than five years before would be exempt from inheritance tax (IHT).
The report also proposed removing taper relief, though it acknowledged this would create a “cliff edge” at the five-year point, as one day would make the difference between paying 40 per cent tax and nothing at all.
Furthermore, the OTS called for the confusing array of gift exemptions to be replaced with a single personal gift allowance, allowing an individual to give up to a fixed amount each year.
Kathryn Cearns, who chairs the OTS, said: “Although only a small number of people pay inheritance tax each year, a far greater number worry about it. The OTS’s packages of recommendations would go some way to achieving the goal of making the tax easier to understand and simpler to comply with.”
There are various ways which your inheritance tax liability can be reduced which will be explored in future blog posts. But if you cant wait, contact Bulpitt Crocker today and arrange a meeting to discuss your IHT position.