7 year rule, you may have heard of it…but what is it?

Gifts made within the 7 year period prior to death, which are not exempted by means of one of the annual allowances, are brought back into the estate for calculating IHT. There is a rule in place which effectively discounts the amount of IHT charged for gifts given more than 3 years prior to death. It is known as taper relief and is provided for on the following scale

Some gifts given during lifetime are classed as chargeable lifetime transfers and can result in a payment of IHT during lifetime to the extent they exceed the available nil rate band of £325,000. The 7 year rule is crucial in determining how much nil rate band is available at the time of the gift during lifetime.

Again well kept records of gifts and transfers of value will make this process much easier and minimize the risk of future challenges.

Gifts with reservation of benefit

A common idea people present in an attempt to reduce an estate and hope to avoid the 7 year rule is to give the home away now but on the understanding they will continue to live in it rent free until it is no longer needed. This falls down on a particular rule Gifts with Reservation of Benefit. In effect this makes it possible to ignore the gift when calculating the estate value at death and include it's value in the IHT calculations.

However if the house is gifted and a market rate rent is paid the gift is unlikely to be classed as a Gift with Reservation of Benefit. The market rate rent would need to be paid during the entire occupation as a failure to do so in the future could see the house brought back into the estate. This area of planning would typically involve large amounts so very careful attention should be given and advice sought when considering it.

Failure to keep good records

When it comes to preparing estate accounts and completing form IHT400 poor record keeping can be a big issue. Trying to understand what took place and ensure the available allowances were used appropriately can fall at the final hurdle if the records don't back it up. Now days with the ability to save and share records electronically it is easier than ever to avoid this pitfall. There should be no need to go through draws, boxes and cabinets in an effort to piece everything together. They will never get lost during a move (especially if downsizing) and if files are shared a reduced risk of them being lost or destroyed.

A practical step to take now would be to review current IHT planning and ensure the documentation supports this, devise a plan to keep digital records and make sure those caring for your estate will have easy and full access.

I hope this IHT series has been helpful to you. My aim is to demonstrate that with a little planning and effective use of allowances great savings can be made to future IHT bills. Effective planning should always avoid potential pitfalls which can effectively undo any planning. If you would like to discuss any features of this series or personal IHT questions please send me a message or give me a call.