Many families are now facing large inheritance tax (IHT) bills despite their attempts to sidestep the 40 per cent charge.
In the UK everyone benefits from a tax-free allowance of £325,000, otherwise known as the “nil-rate band”. If your estate is lower than this when you die, then no tax will be due. However, if your estate is worth more than this, then everything over the threshold will be taxed at up to 40 per cent.
Understanding how the seven-year rule works can help you to protect as much of your wealth for your family as possible.
If a person dies within seven years of making a gift, then the nil-rate band available on their death is reduced by the value of the gift. In other words, the potentially exempt gifts still count as part of the estate until the seven years are up. However, if the deceased had given the money eight years ago, there would be no tax to pay.
This strange rule, which clearly encourages giving away wealth earlier in your life, was introduced to prevent people giving away their wealth on their deathbed.
Everyone has a £3,000 allowance which they can gift each year before it becomes taxable.
It is important to note that some gifts are exempt from IHT such as those between spouses. There are also other exemptions available for wedding gifts. Parents for example can give £5,000 to a child who is getting married while grandparents can give £2,500. To anyone else, the donor can give £1,000.
With IHT receipts increasing each year, it has never been more important to get your head around the legitimate ways you can avoid it!
How to shelter as much of your wealth for your family as possiblehttps://www.telegraph.co.uk/tax/inheritance/inheritance-tax-seven-year-rule/