Inheritance tax: Could the seven-year rule be reduced to five?

The seven-year rule for Inheritance Tax may be reduced to five years, following proposals in a recent review by the Chancellor.

Current rules on UK Inheritance Tax

At present, if someone dies within seven years of giving away money, possessions or property, Inheritance Tax of up to 40 per cent may be due on those gifts.

The Office of Tax Simplification has suggested reducing this time limit to five years.

If adopted, this change would mean that gifts made more than five years before death would be exempt from Inheritance Tax.

Currently, gifts made in the three years before death are taxed at 40 per cent, gifts given between three and seven years before death benefit from taper relief, reducing the tax owed.

In some cases however, gifts made up to fourteen years before death can be included when calculating Inheritance Tax. The OTS has proposed removing this rule, noting that it can be difficult for executors to trace older gifts if records are missing.

Proposed Changes to Inheritance Tax

The report also suggests removing taper relief, but what does this mean?

This would mean that gifts made within five years of death would be taxed at 40 per cent, while those made earlier would be exempt.

The OTS has also recommended replacing the current range of gift exemptions with a single personal gift allowance, so each person could give away up to a set amount each year.

Kathryn Cearns, Chair of the Office of Tax Simplification, said: “Although only a small number of people pay inheritance tax each year, a far greater number worry about it.”

“The OTS’s packages of recommendations would go some way to achieving the goal of making the tax easier to understand and simpler to comply with.”

The OTS has proposed combining the annual gift exemption and the exemption for gifts on marriage or civil partnership into one overall personal gifts allowance.

The OTS pointed out that the annual gift exemption has stayed at £3,000 since 1981 and has not increased with inflation. It recommends that the Government review the level of the new personal gifts allowance and also look at the small gifts exemption, which has been £250 since 1980.

The OTS can only make recommendations for the Government to consider, but these proposals may influence future changes to Inheritance Tax rules.

If you would like advice on the proposed changes to Inheritance Tax gift rules, or on any private client matters, please contact our team at Orwins.