Inheritance Tax ‘seven year rule’ may be cut to five years

A recent Guardian article reported that the ‘seven year rule’ on inheritance tax may be cut to five years.

Currently, gifts made within the seven years before a person’s death are brought back into account when calculating inheritance tax. If the total of the gifts made is over £325,000 then the amount of tax to pay slowly reduces based on how long the person survived making the gift. This is known as taper relief and it reduces the effective rate of tax on a sliding scale from:

  • 40% (if the person died within 3 years of making the gift)
  • 32% (if they died 3-4 years after making the gift)
  • 24% (4-5 years)
  • 16% (5-6 years)
  • 8% (6-7 years)

There are a few exemptions to this rule, such as gifts under £3000/year (an amount which has not changed since 1981 and based on inflation would be £11,900 today) and small gifts (total of £250 per beneficiary each tax year).

The proposals by the Office of Tax Simplification include:

  1. Reducing the 7 year rule to 5 years
  2. Getting rid of taper relief
  3. Getting rid of the exemptions and replacing them with a “single personal gift allowance” of a fixed amount each year

Most of the proposals have been welcomed by tax experts, however the idea of scrapping taper relief is less popular as on reaching the 5 year point, a person living for just one extra day would mean the dramatic difference between 40% tax and no tax at all.

Rebecca Dixon is a solicitor in the private client department at Barker Gotelee, Ipswich solicitors.

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