According to official statistics, an increasing number of families are receiving gifts subject to inheritance tax after breaking the seven-year restriction. So, what is the seven-year restriction and how is it affecting UK families? Read on to find out.
What Is the Seven-Year Rule?
Many donations are exempt from inheritance taxes. For everything else, there are two options: chargeable lifetime transfer (CLT), which is for gifts into a discretionary trust that may be subject to an immediate 20% IHT charge, or potentially exempt transfer (PET), where the gift is only entirely tax-free if you live for seven years (assuming the gift was made to an individual rather than a business or trust). If you pass away within seven years of giving the asset, it will be counted towards your nil-rate band, and you could still be liable to IHT. After seven years, the donation no longer lowers your estate. This is the “seven-year gift rule” for inheritance taxes, catching many families off guard.
Helping Loved Ones
Parents and grandparents are giving away large amounts of money more frequently to get their kids started in the property market and get their estates below the £325,000 mark. Growing asset values have pushed more families to use this tax-free amount, which is set aside until 2028. A higher £1 million threshold is applied to couples who leave their home to their surviving children.
An increasing number of recipients will have an unexpected inheritance tax bill to pay when the donor dies on a gift they could have received several years ago. But how many people have the cash on hand to cover it? What percentage of people used the funds to purchase illiquid assets like new homes? The gifter may not live long enough for the estate to benefit fully from the tax benefit.
The Future for Inheritance Tax and Gifting
Those with assets between £2 and £5 million are especially concerned that they will lose their exemptions from inheritance tax, such as the residence nil rate band or the nil rate band, or that the inheritance tax rate may rise. Furthermore, some have been making gifts (when they can afford to) before the election and now before the budget, and they have been enquiring whether there will be a gift tax.
Difficult decisions lie ahead on spending, welfare, and tax to fix the foundations of our economy and address the £22 billion hole in the public finances left by the previous government. This could very well affect inheritance tax in the near future.
Contact Fleetwood Heir Hunters on 020 8432 3101.