How does the seven year rule work?

A gift that is not otherwise exempt falls out of your estate completely if you survive seven years from making it. Die within that period and it comes back into the calculation.

What happens if you die inside seven years

  1. 1

    The gift is added back

    It is brought into the inheritance tax calculation at its value when it was made.

  2. 2

    It uses the nil rate band first

    Gifts are set against the nil rate band before the rest of the estate is, in the order they were made. That is what makes an early gift expensive for the rest of the estate.

  3. 3

    Tax arises only above the band

    Where the gift is covered by the available nil rate band, no tax is payable on the gift.

  4. 4

    Taper relief applies to the tax, if any

    32% relief at three to four years, 24% at four to five, 16% at five to six, 8% at six to seven.

What taper relief reduces

Taper relief does not reduce the gift

It reduces the tax otherwise payable on the gift. HMRC states this plainly in its own manual.

So a £50,000 gift made five years before death, sitting comfortably inside a £325,000 nil rate band, has no tax on it. There is nothing for taper relief to reduce and it provides no benefit whatsoever. Guidance suggesting you save 16% by surviving five years is describing a case where the gift itself exceeds the band.

Gifts are set against the nil rate band before the rest of the estate is. That is what makes an early gift expensive for everything that follows.

Related questions

Does the seven years run from the date of the gift?

Yes, from the date the gift is actually made.

What if I make several gifts?

Each has its own seven year clock. They are set against the nil rate band in the order they were made, oldest first.

Who pays the tax on a gift?

Primarily the person who received it, though the estate can end up bearing it. Somebody given a large sum can face a bill years later, which is worth mentioning to them at the time.

Is there a fourteen year rule?

There is a longer look-back where gifts into certain trusts are involved, because those are chargeable at the time they are made. For ordinary gifts to people, seven years is the period.

Where this fits

Start by finding out what the bill would be today. Everything else is a decision about that number.

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The advisers for this subject

Sunny Bharj

Sunny Bharj

Independent Financial Adviser

Tony Springer

Tony Springer

Independent Financial Adviser

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