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What is the 7 year rule in inheritance tax?

Inheritance tax (IHT) planning is a crucial consideration for many high net worth individuals. While some inheritances fall below the tax-free threshold (currently £325,000 per individual, with additional allowances like the residence nil rate band available), without proper planning, larger estates may encounter a potentially large bill.

Understanding the 7 year rule in IHT is vital for maximising your ability to pass on wealth to loved ones while minimising their tax burden.

Maritime Capital are trusted wealth guardians for family offices and private clients, ensuring that your inheritance is managed with expertise and care.

A key aspect of managing an inheritance effectively involves understanding the intricacies of inheritance tax planning, and particularly the 7 year rule.

Who pays inheritance tax?

You do not pay inheritance tax on the first £325,000 you leave to other people, and currently fewer than 5% of estates pay inheritance tax. If the deceased was married or in a civil partnership, then anything they leave to their spouse or civil partner will be exempt, regardless of the estimated value of the deceased's estate.

Understanding the 7 year rule

The 7 year rule is a fundamental principle in UK inheritance tax legislation. It dictates that if you gift any part of your estate and survive for seven years after making the gift, the value of the gift is exempt from inheritance tax.

This rule is designed to prevent individuals from circumventing the system by transferring their assets shortly before death to avoid having to pay inheritance tax.

How does the 7 year rule work?

When an individual makes a gift, whether it is property, money, or other assets, and does not survive for seven years following this transfer, the value of the gift is included in the estate for inheritance tax purposes.

The tax rate applied to these gifts is on a sliding scale, known as taper relief, depending on how many years the giver survives after making the gift.

The closer to the seven-year mark, the lower the tax payable.

An example of the 7 year rule

Imagine you give your child a £100,000 gift two years before you pass away. The value of the gift would be added toyour estate for IHT purposes, potentially increasing their tax bill.

However, if you had given the same gift eight years before your death, it would generally be exempt from IHT, assuming you survived for the full seven years.

Transfers to a spouse or civil partner are not usually subject to inheritance tax (IHT), so if the first partner to die leaves their entire estate to the other, no tax will be payable.

Strategies to utilise the 7 year rule

Making potentially exempt transfers

One of the most straightforward ways to take advantage of the 7 year rule is by making what are termed "potentially exempt transfers" (PETs).

These are gifts made during your lifetime that will only be free of inheritance tax if you live for seven years after making the gift.

It's important to note that there is no limit on the total value of a potentially exempt transfer that one can make.

Annual exemption and small gifts

Each tax year, you have a £3000 exemption for gifts that can be given without affecting your inheritance taxthreshold. This unused annual exemption can be carried forward to the next tax year, allowing for a total exemption of £6,000if not used in the previous year.

Additionally, small inheritance tax free gifts of up to £250 per person per year are also exempt, as are wedding gifts within certain limits, regular payments made from your income, and gifts to spouses, civil partners, charities and political parties.

Estate planning and trusts

For larger estates or more complex situations, setting up a trust can be a strategic way to manage your assets and potentially mitigate how much inheritance tax is due.

For example, placing a property into a discretionary trust for the benefit of direct descendants might reduce the tax bill and preserve the value of your estate.

However, the rules around trusts and inheritance tax can be intricate, and professional advice is essential.
Make informed decisions on inheritance tax planning

At Maritime Capital, we understand the importance of effective inheritance tax planning.

Our team is equipped to guide you through the nuances of the 7 year rule, ensuring that you can make informed decisions about gifting and estate planning.

Whether it's assessing the impact of potentially exempt transfers, utilising your annual exemptions or exploring the benefits of trusts, we are here to support you every step of the way.

Inheritance tax planning is more than just mitigating tax; it's about safeguarding your legacy and ensuring that your loved ones gain the maximum benefit from your estate.

With our personalised approach and long-term partnership ethos, we ensure that your wealth is protected and nurtured for generations to come.

If you're navigating the complexities of receiving a large inheritance or seeking to optimise your estate for inheritance tax purposes, contact Maritime Capital.

Our expertise in UK property and wealth guardianship positions is uniquely to assist you in maximising your inheritance while minimising tax liabilities.

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