We are often asked by our clients about the meaning of the 7 year clock. There are a number of misconceptions about this subject.
Essentially the 7 year clock relates to when someone makes a gift during their lifetime. Provided that person lives for 7 years then the gift will be exempt from inheritance tax. If, however, that person, dies within 7 years of the date of that gift, then there may be inheritance tax implications.
A gift can include money, property, personal items or anything that may be of value. A gift can also include a loss in value of something that you have given away, for example if you sell your investment property to your children for less than it is worth, the difference in the values will be treated as a gift (and may also have Capital Gains Tax consequences on you).
Everyone has an annual exemption of up to £3,000 per tax year which they are allowed to give away. This exemption can be carried forward if it has not been used in the previous tax year.
In addition to the £3,000, an individual can also make gifts of up to £250 to as many people as they like, provided that person hasn’t been the recipient of any part of the £3,000.
There are other gifts which can be made without incurring any inheritance tax liability such as wedding gifts, gifts out of surplus income, as well as gifts between spouses. If someone is getting married, a gift can be made of up to £1,000 or if it’s their child that is getting married, a gift of up to £5,000 can be made. Grandparents can also make gifts of up to £2,500 for a grandchild or great-grandchild.
Making regular gifts out of surplus income are exempt so long as it doesn’t affect their usual standard of living (e.g. £200 per month paid by Standing Order). There is a criteria that must be met when making these types of gifts and we recommend you obtain specialist advice in this regard.
Although there are exemptions available for making gifts, some people may wish to make a gift which does not fall within one of the exemptions (e.g. a cash gift of £350,000 to help a child to buy a house) and if so, they do need to bear in mind the potential inheritance tax implications of making that gift on both their personal estate and that of the recipient if the person making the gift were to die within 7 years.
When someone dies, their Personal Representative needs to declare to HM Revenue and Customs any gifts that have been made by the deceased, in the last 7 years. For the purposes of calculating the inheritance tax liability then lifetime gifts are deducted from the inheritance tax threshold of £325,000 (known as the ‘nil rate band’). The rate of inheritance tax is 40% and is charged on the surplus above the nil rate band. Where a deceased received all or part of the estate of their late spouse or civil partner then it is possible for their estate to benefit from any unused ‘transferable nil rate band’.
Only gifts made more 3 years ago (but still within the 7 year clock) which exceed the nil rate band will benefit from a reduction in inheritance tax known as ‘taper relief’.
Making a gift is an important decision and one that should be considered as part of an overall Estate Planning strategy.
For individual advice and assistance contact our Wills, Probate and Trusts Team to find out how we can help.
Charlotte Macalister TEP, Solicitor, Wills, Trusts and Probate