Inheritance Tax (IHT) is the tax charged by HMRC on the estate (property, money, investments, possessions) of someone who has died.

The executor of the estate normally pays Inheritance Tax using the funds from the estate, but beneficiaries may sometimes become liable for paying IHT. The most common reason is if they receive certain gifts that later become taxable, this is known as the 7-Year Rule.

What is the 7-Year Rule for Gifts?

The 7-Year Rule for Inheritance Tax ensures that no inheritance tax is due on any gifts you give providing you live for 7 years after giving them.

Gifts given less than 7 years before you die may be taxed depending on several factors, including:

• Who you give the gift to and their relationship to you
• The value of the gift
• When the gift was given
• Why the gift was given

How the 7-Year Rule Works

There is a common misconception that gifts are always tax-free, but this is not the case.

The 7-Year Rule applies to lifetime gifts that are not immediately exempt. These gifts are classed as Potentially Exempt Transfers (PETs).

If the donor lives for 7 years after making the gift, then no inheritance tax will need to be paid. However, if the donor dies within 7 years, the gift may become a chargeable transfer and potentially taxable.

There are exceptions, and there’s normally no IHT to pay if the value of your estate and chargeable transfers are below the nil-rate band(s) available or you leave everything about the nil rate band(s) to your spouse, civil partner, a charity, or a community amateur sports club.

What Counts as a Gift?

In relation to Inheritance Tax, a gift can include any money, household or personal goods (furniture, jewellery, antiques), a house, land, buildings, or stocks & shares given away and has the effect of reducing diminishing the value of the donor’s estate.

A gift can also include any money you lose when you sell something for less than it’s worth. For example, if you sell your house to your child for less than its market value, the difference in value counts as a gift.

Anything you leave in your will does not count as a gift but is part of your death estate. The value of your estate plus the value of chargeable transfers prior to death will be required when calculating whether the estate is chargeable to Inheritance Tax, and if so, to what extent.

What happens if you die within 7-Years of Giving a Gift?

• The remaining estate is taxed after the gifts are accounted for.
• IHT is charged at up to 40%.
• The gift recipient is normally responsible for paying the IHT.
• If left unpaid, tax may be settled by the estate.

Exemptions to the 7-year rule

There are, however, some common gifts which are IHT free. These include:

• £3,000 annual exemption: You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate.
• Small gifts of up to £250 per person per year: Birthday or Christmas gifts you give from your regular income are exempt from IHT
• Wedding gifts: £5,000 to a child, £2,500 to a grandchild/great-grandchild, £1,000 to any other person (limits depend on the relationship)
• Regular gifts out of surplus income: This must be evidenced as forming surplus income and must not be from capital or the relief will not apply.

Key Takeaways

The 7-Year Rule can make a big difference to your Inheritance Tax position and misunderstanding it can be costly. To plan effectively for your IHT, clear records, early planning, and knowing which gifts are exempt is crucial.

Being able to think ahead and prepare for the future equips you with not just reassurance the knowledge to move with confidence.

If you’re looking for advice relating to Inheritance tax, gift-giving, and what you can give away tax-free during your lifetime, we’ll be happy to help!