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Dave Beans

Inheritance Tax - 7 Year Rule

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Does anyone know how this works, say if you give away £20k, and the person dies three years later? How much tax, for example would be due? Is it a flat rate, or does it rise, depending on the worth of the asset / amount of cash held?

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As I understand it it's prorata; ie IHT is due on a sliding scale over the seven years, reducing to zero if you survive the full term.

Caveat: gifting / offloading some assets to a relative (primary residence excepted) may trigger an instant and painful CGT liability, payable now rather than deferred until you die, when the estate is accounted for.

Happy to be corrected but this is what I took the complex rules to mean when I had a discussion with HMRC recently.

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Does anyone know how this works, say if you give away £20k, and the person dies three years later? How much tax, for example would be due? Is it a flat rate, or does it rise, depending on the worth of the asset / amount of cash held?

Firstly, does the estate exceed the threshold of £325,000 (or £650,000 for couples)? If so the excess is taxable at the rate of 40%.

Assuming that the estate does exceed the threshold then it depends how long the person lives. If the person dies within 3 years then the whole of the gift is included in the estate and the estate needs to pay another £8,000 IHT. If the person dies within 3-7 years there's a taper of 20% per year so that were he to die just before the 7th anniversary the tax would only be £20,000 x 20% (taper) x 40% (tax) = £1,600.

There are also certain exemptions such as the first £3,000 being exempt, gifts for weddings (limits apply), small gifts (>£250). Possibly the most significant exemption is for gifts from income, if the person doing the giving has a very high annual income that £20,000 might qualify as such and be outside of the scope of IHT.

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Firstly, does the estate exceed the threshold of £325,000 (or £650,000 for couples)? If so the excess is taxable at the rate of 40%.

Assuming that the estate does exceed the threshold then it depends how long the person lives. If the person dies within 3 years then the whole of the gift is included in the estate and the estate needs to pay another £8,000 IHT. If the person dies within 3-7 years there's a taper of 20% per year so that were he to die just before the 7th anniversary the tax would only be £20,000 x 20% (taper) x 40% (tax) = £1,600.

There are also certain exemptions such as the first £3,000 being exempt, gifts for weddings (limits apply), small gifts (>£250). Possibly the most significant exemption is for gifts from income, if the person doing the giving has a very high annual income that £20,000 might qualify as such and be outside of the scope of IHT.

Nope, it doesn't...Its only about £25 - £30k in total. No property is involved.

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