Inheritance Tax and the 7 Year Gifting Rule
Published / Last Updated on 22/01/2025
Pub Talk
- It is often a misconception, we call it ‘pub talk’, that the maximum you can make financial gifts for inheritance tax purposes is £3,000 per year.
- It is also ‘pub talk’ that if you make a financial gift, it is free from any care fees means test after 7 years.
Professional Adviser Talk – Inheritance Tax
- You can make unlimited financial gifts to people, and you are not restricted by £3,000 per year. If you want to gift £100,000, £200,000, or even £1,000,000 as part of your inheritance tax planning you can. There is no law against it but there is a 7-year gifting rule that we explain below when making gifts to individuals. That said, you must be careful when making financial gifts to businesses or to a discretionary trust.
Professional Adviser Talk – Care Fees Means Test
- If you make a financial gift to avoid the care fees means test, this is called ‘deprivation of assets’, and a local authority or Court can go back as long as they choose, if it was deliberate asset deprivation, to include that money in a care fees means test and a Court can even ‘order’ its return.
Inheritance Tax and the 7-Year Gifting Rules
- You can gift as much as you wish each year.
- We all have a £3,000 pa annual exemption. If you did not use last year’s £3,000 annual exemption, you can double up in the current tax year with £3,000 (last year’s exemption) + £3,000 (current year exemption) meaning £6,000 gifting exemption.
- This means that the first £3,000 of gifts that you make this year are immediately outside your estate for inheritance tax purposes. The balance of the gift then becomes a Potentially Exempt Transfer (PET). E.g., £100,000 gift this year, less £3,000 annual exemption = £97,000 gift that is a PET. If you live for 7 years, the PET then falls outside your estate and is IHT free.
PETs and 7 Year Rule
- The amounts and number of PET financial gifts you make accumulate over a 7-year period.
- PETs made within 7 years are included in your estate calculation for IHT on death.
- After 7 years (in year 8), any financial gifts made in year 1 drop out of your estate, in year 9 (gifts made in year 2) drop out of your estate and so on
- If cumulative PET gifts made within 7 years of death are over the inheritance tax nil rate band NRB (currently £325,000), then excess PETs are included in the estate (as well as the PETs up to the NRB) and become Chargeable Lifetime Transfers but the excess is then subject to taper relief.
See Taper Relief Details: IHT Rates
Example Gifts Made Over 20 Years
|
|
Gift |
Less £3,000 Annual Exemption Used |
Potentially Exempt Transfer (PET) |
Cumulative 7yr PETs |
Annual Exemption Note |
Nil Rate Band |
PET Value In Estate on Death in Year using up NRB |
Remaining NRB for Rest of Estate |
Excess NRB PETs so 40% IHT BUT Subject to Taper Relief |
|
Year 1 |
£100,000 |
£6,000 |
£94,000 |
£94,000 |
Double Annual Exemption as not used previous year (2 X £3,000 = £6,000). |
£325,000 |
£94,000 |
£231,000 |
£0 |
|
Year 2 |
£150,000 |
£3,000 |
£147,000 |
£241,000 |
|
£325,000 |
£241,000 |
£84,000 |
£0 |
|
Year 3 |
£100,000 |
£3,000 |
£97,000 |
£338,000 |
|
£325,000 |
£338,000 |
£0 |
£13,000 |
|
Year 4 |
£0 |
£0 |
|
£338,000 |
|
£325,000 |
£338,000 |
£0 |
£13,000 |
|
Year 5 |
£0 |
£0 |
|
£338,000 |
|
£325,000 |
£338,000 |
£0 |
£13,000 |
|
Year 6 |
£0 |
£0 |
|
£338,000 |
|
£325,000 |
£338,000 |
£0 |
£13,000 |
|
Year 7 |
£0 |
£0 |
|
£338,000 |
|
£325,000 |
£338,000 |
£0 |
£13,000 |
|
Year 8 |
£0 |
£0 |
|
£244,000 |
|
£325,000 |
£244,000 |
£81,000 |
£0 |
|
Year 9 |
£100,000 |
£6,000 |
£94,000 |
£191,000 |
Double Annual Exemption as not used previous year (2 X £3,000 = £6,000). |
£325,000 |
£191,000 |
£134,000 |
£0 |
|
Year 10 |
£100,000 |
£3,000 |
£97,000 |
£191,000 |
|
£325,000 |
£191,000 |
£134,000 |
£0 |
|
Year 11 |
£100,000 |
£3,000 |
£97,000 |
£288,000 |
|
£325,000 |
£288,000 |
£37,000 |
£0 |
|
Year 12 |
£100,000 |
£3,000 |
£97,000 |
£385,000 |
|
£325,000 |
£385,000 |
£0 |
£60,000 |
|
Year 13 |
£0 |
£0 |
£0 |
£385,000 |
|
£325,000 |
£385,000 |
£0 |
£60,000 |
|
Year 14 |
£0 |
£0 |
£0 |
£385,000 |
|
£325,000 |
£385,000 |
£0 |
£60,000 |
|
Year 15 |
£0 |
£0 |
£0 |
£385,000 |
|
£325,000 |
£385,000 |
£0 |
£60,000 |
|
Year 16 |
£0 |
£0 |
£0 |
£291,000 |
|
£325,000 |
£291,000 |
£34,000 |
£0 |
|
Year 17 |
£0 |
£0 |
£0 |
£194,000 |
|
£325,000 |
£194,000 |
£131,000 |
£0 |
|
Year 18 |
£0 |
£0 |
£0 |
£97,000 |
|
£325,000 |
£97,000 |
£228,000 |
£0 |
|
Year 19 |
£100,000 |
£3,000 |
£97,000 |
£97,000 |
|
£325,000 |
£97,000 |
£228,000 |
£0 |
|
Year 20 |
£100,000 |
£3,000 |
£97,000 |
£194,000 |
|
£325,000 |
£194,000 |
£131,000 |
£0 |
Gifts to Businesses and/or Discretionary Trusts
- Financial gifts to businesses and discretionary trusts are not potentially exempt transfers (PETs) they a Lifetime Transfers.
- This means that any gifts to business or discretionary trusts (when added to PETs already made) that exceed the inheritance tax nil rate band (NRB), currently £325,000, are Chargeable Lifetime transfers that are subject to an immediate inheritance tax charge of 20% i.e., IHT is payable in life, and if you also then die within 7 years, with then be subject to a further 20% tax charge.
Inheritance tax planning can be complex and now given that unused pension funds (and pension death in service life insurance lump sums) will be included in your estate for IHT purposes from 2027, IHT planning is more important today than it ever has been.
There are many ways that you can plan for and reduce IHT liabilities (even overnight) and we suggest you contact us to talk about how we can help you.
