People sometimes like to make cash gifts to family or friends during their lifetime. This could be for a variety of reasons and whilst their generosity is appreciated, the person may not realise if the gift is made within seven years of their death this could affect how much inheritance tax they may have to pay.
In essence, all gifts which total over £3,000 in any one year and made within seven years of your death, need to be declared to the Inland Revenue. You may have to pay inheritance tax as a result. Gifts that are made outside of the seven-year period, are generally not taken into account.
Under current inheritance tax rules, an individual is entitled to gift the total sum of £3,000 in any one tax year as part of their annual exemption. This sum can be carried over from a previous year’s unused exemption, but only once. Certain gifts are exempt from inheritance tax, such as gifts between spouses or to charities. In addition, wedding and birthday gifts between certain family members, can also be exempt.
You are, of course, perfectly entitled to gift as much of your hard-earned money to whoever you want. Nowadays it is not unusual for a parent or grandparent to want to gift a substantial sum of money to children or grandchildren to help towards a house deposit. Yet if this gift falls within seven years of their death, this could significantly reduce the inheritance tax allowance i.e the nil rate band (NRB) on their death. The gift will be offset against the NRB, which is currently £325,000. Any assets in their estate above this amount or any balance of the gift over the value of the NRB will be taxed at 40%.
This is a very basic overview and depending on each individual’s circumstances there may be other allowances that can be claimed on death.
It is, however, worthwhile knowing about the seven-year rule. If you would like further information on the possible implications of making lifetime gifts, the exemptions or the allowances that are available to claim on death or would like to discuss this in conjunction with your Will, then we would be very happy to meet with you to discuss further. Please contact Tracey Pugh.