Taper relief IHT

castle96

See end - that's not true is it.??


"Sean McCann, of the wealth manager NFU Mutual, said the seven-year rule was yet another way in which inheritance tax had become “fiendishly complicated”. 

“It frightens people,” he said. “And it has become a more pressing problem for families, we see the numbers creeping up all the time. 

“The tax is very complicated so there are a lot of misconceptions about how it works. For example, most people think if they give away money and die before the seven year limit, they will still get a ‘tapering relief’, but that is not how it works.” 

If individuals make a gift and then die within seven years, its value eats into the £325,000 tax free allowance. This means the full allowance may not be available on death, and the estate may pay more tax as a result. 

The tapering of the tax only applies if the individual gives away more than £325,000 in the seven year period. "

Albermarle

Yes I think it is . If you say give away £100K and live 6 years, there is no taper and the full £100K is included back in your estate. It only applies if the gift is more than your nil rate band AFAIK

If individuals make a gift and then die within seven years, its value eats into the £325,000 tax free allowance. This means the full allowance may not be available on death, and the estate may pay more tax as a result. 

I do not understand this comment though. If you give away £100K and then die within 7 years, it is counted in the estate. So you are back where you started. Not sure how that means you could pay more tax.

Keep_pedalling

Gifting nearly always results in less tax to pay not more, the only possible way it could cost more is if a married person gave away more than their NRB which results in IHT being due on the first death instead of being covered by spousal exemption.

To clarify taper relief not only applies to gifts over the NRB but it only applies to the portion of the gift (or gifts) exceeding the NRB.

I can’t agree that the 7 year rule makes anything fiendishly complicated it is relatively straight forward.

castle96

The 7 year rule

No tax is due on any gifts you give if you live for 7 years after giving them - unless the gift is part of a trust. This is known as the 7 year rule.

If you die within 7 years of giving a gift and there’s Inheritance Tax to pay on it, the amount of tax due after your death depends on when you gave it.

Gifts given in the 3 years before your death are taxed at 40%.

Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

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

Taper relief

Years between gift and death	Rate of tax on the gift
3 to 4 years	32%
4 to 5 years	24%
5 to 6 years	16%
6 to 7 years	8%
7 or more Well, I never knew that. So if I gave my son £100k last year, and I don't live another 6 (or +), I've just wasted my time and my estate will still be taxed on this £100K !? (ASSUMING i CAN NEVER GIVE AWAY MORE THAN £325)	0%

Keep_pedalling

castle96 said:

The 7 year rule

No tax is due on any gifts you give if you live for 7 years after giving them - unless the gift is part of a trust. This is known as the 7 year rule.

If you die within 7 years of giving a gift and there’s Inheritance Tax to pay on it, the amount of tax due after your death depends on when you gave it.

That is not how it works, if you die within 7 years the gifts are added to your estate and only if the estate is over the exemptions will IHT be payable and it comes out of the residual estate not clawed back from the gift. The only exception to this would be if so much was given away there was not enough left in the estate to meet the IHT bill.

Gifts given in the 3 years before your death are taxed at 40%.

Again it’s not the gifts that are taxed

Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

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

Taper relief

Years between gift and death	Rate of tax on the gift
3 to 4 years	32%
4 to 5 years	24%
5 to 6 years	16%
6 to 7 years	8%
7 or more Well, I never knew that. So if I gave my son £100k last year, and I don't live another 6 (or +), I've just wasted my time and my estate will still be taxed on this £100K !? (ASSUMING i CAN NEVER GIVE AWAY MORE THAN £325)	0%

Well, if you don’t make the gift don’t spent it yourself and live for more than 7 years then you really have waisted an opportunity for your estate to save £40k in tax. The same applies if you could actually afford to give over £325k away. If for example you gave him £400k only £75k of that would be subject to taper relief. 

There is a fairly cheap (if you are not too old and in good heath) way to cover any IHT on the value of failed PETs and that is to take out term life insurance to cover the amount of IHT that would be due if you met an untimely demise. 

castle96

This is truely a revelation to me (and I am sure a lot of people), most of whom think that anything    'given away... last 7 years.... estate is free of IHTon that amount'

Albermarle

Yes we see many posters with that misconception.

On the other side we see many posters who think if you give away more than £3K pa you will pay more tax, maybe even straightaway. Or that if you receive a big gift it will be taxable in some way.
Often these posters do not have an estate big enough to even incur IHT !

Part of the problem is that there are lots of articles about the 'death tax' in certain newspapers/news outlets ( often read on line of course) that are either inaccurate, or just written badly.

castle96

Where would the 'additional' £175 RNRB come into the calculation? ie I leave him the house.
 So I could give away £325 (+ £175) one day before death (ie the 7 yr rule doesnt come into it), then any excess over this amount is then subject to the 7 yr rule ?

castle96

Sorry, sorry. I am still confused ! PLEASE bear with me. NEED to know

How Inheritance Tax on a gift is paid

Any Inheritance Tax due on gifts is usually paid by the estate, unless you give away more than £325,000 in gifts in the 7 years before your death. Once you’ve given away more than £325,000, anyone who gets a gift from you in those 7 years will have to pay Inheritance Tax on their gift.

The 7 year rule

No tax is due on any gifts you give if you live for 7 years after giving them - unless the gift is part of a trust. This is known as the 7 year rule.

If you die within 7 years of giving a gift and there’s Inheritance Tax to pay on it, the amount of tax due after your death depends on when you gave it.

Gifts given in the 3 years before your death are taxed at 40%.

Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

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

Taper relief

Years between gift and death	Rate of tax on the gift
3 to 4 years	32%
4 to 5 years	24%
5 to 6 years	16%
6 to 7 years	8%
7 or more	0%

Giving gifts you still benefit from   (from Gov site).

I cannot see that you have to have given away £325 before you get relief. Am I daft. Just cannot see it/

Jeremy535897

Ignore RNRB and spouses. Suppose you have a £1 million estate. Inheritance tax on death is £1 million - £325,000 = £675,000 at 40% = £270,000.

Now say you give £325,000 (ignoring the annual exemption etc) to your son 6 years and a day before you die. The gift is a failed PET because you didn't survive 7 years. The gift used all the nil rate band, so the tax on death is £675,000 (the value of the estate) at 40% = £270,000.

Now say you give £500,000 (ignoring the annual exemption etc) 6 years and a day before your death. This is still a failed PET, but the tax now due is £500,000 (the remaining estate) at 40% = £200,000, plus (£500,000-£325,000) at 8% = £14,000, total £214,000. Taper relief on the excess of £175,000 over the nil rate band applies.

Keep_pedalling

castle96 said:

Where would the 'additional' £175 RNRB come into the calculation? ie I leave him the house.
 So I could give away £325 (+ £175) one day before death (ie the 7 yr rule doesnt come into it), then any excess over this amount is then subject to the 7 yr rule ?

The 7 year rule applies to all non exempt gifts, if you did this the gifts will have used up both NRBs and assuming you are not a widower or married then all of your remaining estate will be subject to IHT, so the gift makes no difference to the amount of IHT paid by your estate (unless you had not previously used your annual exemptions).