The Inheritance Tax Seven Year Rule
Inheritance Tax is a tax on gifting on death or within seven years of death or on gifting into a trust.
You should be aware that the scenarios described in this article do not cover all possible inheritance tax planning issues and you should seek our specific advice in relation to your particular circumstances.
In this article we look at the 7 year rule, Gifts with Reservation, the Family Home
Lifetime gifts – the 7 year rule (PETs)
If you make a gift more than seven years prior to your death the value of the gift will no longer be considered to be a part of your estate. Such a gift when made is considered a PET (a potentially exempt transfer) i.e. the gift will be exempt of any Inheritance Tax charge if you live more than the seven years. If for example you make a lifetime gift of say £200,000 this will use up part of your personal nil rate band allowance which is currently £325,000. After seven years your full allowance is restored. You can thus make gifts in the hope you live the seven years. Seven year term assurance life policies can be taken out and written in trust for beneficiaries to hedge the risk of death within this period. If you propose to gift an asset other than cash you will need to consider any capital gains tax implications.
If you propose to gift into a trust there will be an inheritance tax charge at the lifetime rate of 20% on any amount gifted in excess of the nil rate band allowance. This will be payable on the date of the gift to the trust.
Gifts with reservation
A gift must be cleanly and absolutely made or it may be ignored by the Capital Taxes Office, the part of the Inland Revenue responsible for collecting Inheritance Tax, under the “reservation of benefits” rule. This means you not must retain any benefit was the asset has been gifted. For example if you add an adult child as a joint signatory to a savings account, eg., £100,000 Building Society or Bank account, on death you are not deemed to own a half, ie., £50,000 but the entire account as you could have accessed the entire amount of £100,000 any time prior to your death. Similarly if a home is transferred to children by a parent who continues to reside in the house that gift is deemed to be a gift with reservation, i.e., a benefit (residence) continues to be enjoyed by the parent. On the death of the parent 5, 10, or even 20 years later even though the legal estate in the home is in the children, the value of the home at the date of death is deemed still to be in the parent’s estate for Inheritance Tax purposes. Gifts made into trusts of less than the nil rate band for children or grandchildren fall into the same category; they work to start the 7 year period providing the person who makes the gift does not reserve or take any financial or usage benefits out of the trust funds or assets.
The family home
Gifting your home into your childrens names can work for Inheritance Tax purposes if you rent it’s use back from your children for the rest of your life. There are however a number of very strict criteria surrounding such circumstances in order not to fall foul of the “reservation of benefits” rule:-
- both you and your children need to be advised by different solicitors;
- a valuation of your home needs to be effected at the date of the gift;
- a proper tenancy agreement needs to be signed in respect of your rental of the home;
- the tenancy agreement needs to have regular rent review arrangements with independent agent reassessments of the market rent; and
- you need to pay the rent or increased reviewed rent on time regularly without default.
Such arrangements are relatively rare as the rules are strictly applied to the extent that if you failed to adhere to these rules at any point prior to your death even years later after making the gift a reservation of benefit could be deemed and your home could be considered in your estate for Inheritance Tax purposes on your death.
The information contained in this article is relevant to the date upon which it is distributed; advice given verbally by Wilson Nesbitt is also only relevant to the day upon which it is given. Tax laws change every year and it is the individual responsibility of each Wilson Nesbitt client to ensure that their Will reflects the current legal and tax position. Wilson Nesbitt cannot and do not give any assurance whatsoever that the legal and tax position at the date of death of a client will be the same as at the date advices are given or Wills are executed.
Gilbert Nesbitt & Lenore Rice
Gilbert and Lenore are senior partners of Wilson Nesbitt, solicitors. Gilbert has been a solicitor since 1978 and a partner in the firm since 1982. Gilbert has been a member of the Society of Trusts and Estate Practitioners since shortly after it’s foundation in the 1990s. Lenore has been a solicitor since 2009, a partner in Wilson Nesbitt since 2012 and a member of the Society of Trusts and Estate Practitioners for the last ten years. They share responsibility for the tax, trust, wills and estate administration department of Wilson Nesbitt assisted by six specialists.Either Gilbert or Lenore are happy to have a phone or video call or meet clients face to face (behind Perspex screens) to discuss Inheritance Tax, complex Will planning or other matters in either our Belfast or Bangor offices.
POSTAL WILL OR ENDURING POWER OF ATTORNEY MAKING
We provide you with a free postal information pack on how to make your Wills and Enduring Powers of Attorney by completing and returning a questionnaire to us, receiving draft Wills and Enduring Powers of Attorney from us for you to review, using our phone helpline and then receiving you are ready to sign Will & Enduring Power of Attorney with instructions on how to sign the documents in accordance with the legal requirements.
Take the next step and call us on freephone number 0800 840 9293 or email Wills@Wilson-nesbitt.co.uk to request a free postal Wills & Enduring Powers of Attorney information pack on how you can use our postal service at little cost to make your Wills, make your Enduring Power of Attorney, gift transfer your property or arrange a phone or video call or face to face (behind Perspex screens) consultation with one of our solicitors on making your Will, Inheritance Tax planning, gifting or other tax planning matters.
See our other articles on Inheritance Tax, Making your Will or Enduring Power of Attorney:-
- Making a Will
- Enduring Powers of Attorney;
- Inheritance Tax Personal Allowances & Exemptions;
- Inheritance Tax Residential Nil Rate Band;
- Inheritance Tax & Deeds of Variation
- Inheritance Tax Business Property Relief;
- Inheritance Tax Trust & Trustees;
- Joint Tenants or Tenants in Common?
- Reduce Inheritance Tax by Charitable Giving;
- Standard Provisions of the Society of Trust & Estate Practitioners;