Under proposed changes to inheritance tax (IHT), the current rules on gift-giving could be cut down from seven years to five.

Current 7-year rule

Under existing government rules, any gifts made during your lifetime over the annual gifting allowance of £3,000 are taxable for Inheritance tax using a sliding scale known as ‘Taper Relief’. In essence, any lump sums of money or assets gifted over £3,000 to individuals are taxable if the gift is made within 7 years of a person’s death. To better demonstrate this, if Mr Moor gifted £25,000 to his daughter in 2017 to put towards a deposit on her first home, and he then sadly passed away a year later, the £25,000 gift he made would be taxable at 40% with the rest of his estate assets.

However, if Mr Moor had gifted the £25,000 to his daughter 7 or more years before his death, this would then have fallen out of his estate and would not be a taxable gift.

To further demonstrate Taper Relief which applies to gifts made between 3 to 7 years before a person’s death, look to the sliding scale shown below:

Years between gift and death Tax paid
less than 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
7 or more 0%

Proposed changes to the 7-year rule

A review of the current system ordered by Chancellor Philip Hammond claims the period in which executors are required to account for gifts made within seven years of death should be reduced to five years.

The Office of Tax Simplification (OTS) has put forward the changes, however, some tax experts say another suggested change linked to this would increase tax for some people.

Inheritance tax affects a small percentage of the population; fewer than 25,000 estates are liable each year, which is less than 5% of all deaths.

Under the proposed changes, gifts given more than five years before death would be exempt and there would be a possible scrapping of taper relief, meaning the full 40% tax would be required up to five years which one day would be the difference between paying 40% and nothing at all.

For further information or advice in relation to Inheritance Tax or Gifting, please contact our Legal Team on 01472 694569.

Sophie Vines – Director of Legal Services and Inheritance Tax specialist.

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