Seven year rule seems widely misunderstood

waveyjane

This is just an observation, but I've seen discussions on MSE and elsewhere on the web which imply that all gifting is subject to an inheritance tax taper relief. 

The taper rule only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold.

So if anyone is under the impression that all gifts are subject to the taper - they may well not be unless you have a pretty big estate to fling about!

Sea_Shell

I agree, it's confusing.

So what happens if you gift a smaller amount to specifically take your estate below the IHT limits?

Say £50k?

Doesn't it get added back in, if within 7 years?

Can you gift up to £325k with impunity from the taxman?

p00hsticks

It's not only that - many people on these boards seem to think you can only gift £3000 a year, a number seem to think that the recipient has to treat a monetary gift as income and pay income tax on it, and so on and so on.... 

and many of those who are looking for potential ways to avoid IHT have estates of a size that means that they wouldn't be subject to it anyway, once you factor in the transferable allowances between spouses and the residential allowances. 

Albermarle

Sea_Shell said:

I agree, it's confusing.

So what happens if you gift a smaller amount to specifically take your estate below the IHT limits?

Say £50k?

Doesn't it get added back in, if within 7 years? If you die within 7 years, it will be added back in ( all of it) 

Can you gift up to £325k with impunity from the taxman?. No any amount you gift over the small annual allowances will be added back in if you die within 7 years.
If you gift above £325K and die within 7 years, there is a possibility that the recipient maybe be liable to pay some IHT ( this is where the taper comes in)
However more experienced posters in this area have said in practice this hardly ever happens, as the estate usually coughs up any money due and HMRC are only bothered they get the right amount, not who it comes from. 

You can gift up to £3Kpa, that will never be added back in, plus allowances for birthday and wedding gifts. But ignoring those for now, I have answered your questions in bold.

Albermarle

waveyjane said:

This is just an observation, but I've seen discussions on MSE and elsewhere on the web which imply that all gifting is subject to an inheritance tax taper relief. 

The taper rule only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold.

So if anyone is under the impression that all gifts are subject to the taper - they may well not be unless you have a pretty big estate to fling about!

I read a recent article in the DT, that also got this wrong. In the comments section someone said ' you ( as in the DT) have still have got taper relief wrong, although you have been told about it numerous times' 

Sea_Shell

So the taper rule and the 7 years are two different things?

In the main, recipients don't need to worry that they'll be pursued for IHT?

It's still wise to keep details of any (all) gifting, if only to make your executor's job easier?

waveyjane

Sea_Shell said:

I agree, it's confusing.

So what happens if you gift a smaller amount to specifically take your estate below the IHT limits?

Yes - it's confusing and there are some points I'm still not sure on, but ...

If your (combined if you're a couple) estate is likely to be above the nil rate threshold on second death, and you feel you might live for seven years, then it may be worth thinking about as a means of reducing IHT.

Otherwise consider whether gifts might be nice for other reasons. 

This is becuse as @p00hsticks points out, if your total estate is under the value of the nil rate band allowance(s), then gifting is pointless as a means or reducing IHT becuase you won't be paying IHT anyway. And bearing in mind that a married/CP couple could have a combined tax-free allowance (2 x NRB + 2 x RNRB) of up to a million quid on second death - then not paying any IHT is a real possibility.

And even if the estate is above the allowance when you die, you cannot avoid IHT by gifting, unless you die seven years after giving a gift. Until then, the value of each gift is part of the value of your estate, and inheritence taxed accordingly.

As to the "taper": if the total value of all gifts you make in the seven years before you die add up to more than £325,000, then the Revenue will look at all the gifts you (and your spouse) made and apply a taper to them after 3 years. But again, that may well be irrelevant if your estate is below the threshold (which might be as much as a million as I've said).

BTW I don't know if the £350K taper threshold is for each person or for the combined estate. I also think your house has to be worth more than £175,000 to qualify for the Residence Nil Rate Band too, but I'm not sure.

Albermarle

Sea_Shell said:

So the taper rule and the 7 years are two different things?

In the main, recipients don't need to worry that they'll be pursued for IHT?

It's still wise to keep details of any (all) gifting, if only to make your executor's job easier?

If you gift money, then it will all be counted back into the estate if you die within 7 years - 100%, no taper.
If the gift is very large ( > £325K) and you die within 7 years and the estate owes IHT it can not pay, then the recipient can be chased for tax owed, but in this case the taper rule applies. I presume this rule is in place to stop people giving away their whole estate when probably not being too far off dying.
Normally recipients do not have to worry about paying IHT, although there is a lot of misunderstanding about this.

It's still wise to keep details of any (all) gifting, if only to make your executor's job easier?
Definitely yes. Although whether you would include less explicit gifts, like paying for a meal out, helping with travel costs etc is probably a more grey area.

Sea_Shell

waveyjane said:

Sea_Shell said:

I agree, it's confusing.

So what happens if you gift a smaller amount to specifically take your estate below the IHT limits?

Yes - it's confusing and there are some points I'm still not sure on, but ...

If your (combined if you're a couple) estate is likely to be above the nil rate threshold on second death, and you feel you might live for seven years, then it may be worth thinking about as a means of reducing IHT.

Otherwise consider whether gifts might be nice for other reasons. 

This is becuse as @p00hsticks points out, if your total estate is under the value of the nil rate band allowance(s), then gifting is pointless as a means or reducing IHT becuase you won't be paying IHT anyway. And bearing in mind that a married/CP couple could have a combined tax-free allowance (2 x NRB + 2 x RNRB) of up to a million quid on second death - then not paying any IHT is a real possibility.

And even if the estate is above the allowance when you die, you cannot avoid IHT by gifting, unless you die seven years after giving a gift. Until then, the value of each gift is part of the value of your estate, and inheritence taxed accordingly.

As to the "taper": if the total value of all gifts you make in the seven years before you die add up to more than £325,000, then the Revenue will look at all the gifts you (and your spouse) made and apply a taper to them after 3 years. But again, that may well be irrelevant if your estate is below the threshold (which might be as much as a million as I've said).

BTW I don't know if the £350K taper threshold is for each person or for the combined estate. I also think your house has to be worth more than £175,000 to qualify for the Residence Nil Rate Band too, but I'm not sure.

We're currently on the cusp (no kids) but not ready to start giving it away yet😉 (in our 50s)

We might, in time, maybe, we'll see.

Mostly it'll be dependent on any inheritances we may get, and we will give serious consideration to a DoV when (if) the time comes.

waveyjane

@Albermarle

If you gift above £325K and die within 7 years, there is a possibility that the recipient maybe be liable to pay some IHT ( this is where the taper comes in)

Possibly confusing there, I think. It's a total of £325K over 7 years, not just a gift over that amount. And the taper is nothing to do with who pays IHT - if that's what you imply?

But yes, while technically the only people who pay IHT are the executors of the estate, not the beneficiaries, in practice I'm sure HMRC will take anyone's money :-)

Albermarle

waveyjane said:

@Albermarle

If you gift above £325K and die within 7 years, there is a possibility that the recipient maybe be liable to pay some IHT ( this is where the taper comes in)

Possibly confusing there, I think. It's a total of £325K over 7 years, not just a gift over that amount. Yes that is what I meant really And the taper is nothing to do with who pays IHT - if that's what you imply? I thought it was but could well be wrong

But yes, while technically the only people who pay IHT are the executors of the estate, not the beneficiaries, in practice I'm sure HMRC will take anyone's money :-)
I understood beneficiaries can be technically liable if the gift is above £325K ( and the giver does not live 7 years)  and the estate is unable to pay any IHT due.

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