Inheritance Tax – Why more people are giving gifts early and the seven-year rule explained

Inheritance Tax (IHT) isn’t just about the money, property, and possessions of someone who has passed away. It also covers gifts they might have given before they died.

When most people think of IHT, they think of it as a tax on what someone leaves behind when they die. But it is also important to know about the tax on gifts given by someone before they passed away.

Over the past decade, there’s been a noticeable increase in the number of families choosing to distribute their wealth before their passing. This move is primarily to sidestep the IHT imposed by the Government.

Data from HM Revenue & Customs (HMRC), taken from a Freedom of Information request, reveals a 48 per cent surge in families using this exemption over the past ten years.

The seven-year rule and taper relief

If you have received a gift from someone and they die more than seven years after giving it, then there is no tax to pay. However, if they die within seven years of giving the gift, tax will be owed.

The good news is the amount of tax goes down each year after the gift is given, thanks to something called taper relief. Here’s how it works:

  • Death is zero to three years after giving the gift – 40 per cent tax
  • Three to four years – 32 per cent
  • Four to five years: 24 per cent
  • Five to six years: 16 per cent
  • Six to seven years: 8 per cent
  • Seven years or more: 0 per cent

Who pays the tax on gifts?

Usually, the estate of the person who died pays any IHT due on gifts. However, if the gifts are worth more than £325,000 and were given in the seven years before the person died, the person who received the gift might have to pay.

What types of gifts are taxed?

According to Government guidelines, the below items are subject to IHT:

  • Money
  • Things like furniture, jewellery, or antiques
  • Houses, land, or other buildings
  • Stocks and shares on the London Stock Exchange
  • Shares not on the stock exchange if they were held less than two years before the person died

Are any gifts not taxed?

Gifts between spouses and civil partners are usually tax-free. Also, regular gifts like birthday or Christmas presents, donations to charities, political parties, and housing groups aren’t subject to IHT.

Other gift allowances

There is an annual exemption of £3,000 a year that can be gifted without being taxed. If you don’t use it all, you can carry over any left over to the next year (but only for one year).

You can also give small gifts worth up to £250 to as many people as you like every year. But you can’t use this allowance and another one for the same person in the same year.

There are special allowances for wedding gifts. Parents can give £5,000, grandparents can give £2,500, and anyone else can give £1,000 without it being taxed.

The rules around IHT on gifts can be tricky. If you’re unsure about anything, our expert team are on hand to talk to you today.