The 7-year rule only applies to liability for Inheritance Tax (IHT).
If your total estate at death is valued at more than the Nil Rate Band (NRB)*, there will be Inheritance Tax (IHT) of 40% due on the remaining amount.
Can you give away your money before you die?
Yes, you give away as much money or assets to your child/grandchild or whoever you like. It doesn’t matter how much you give them, so long as you survive for more than seven years, then there is no liability on your estate. (There are also rules on small gifts you can give away without any penalty). The tricky bit is that none of us knows how long we will live for and when is the best time to do this. What if you need the money yourself?
What if you don’t survive 7 years?
Any substantial sums or assets you have given away in the 7 years prior to your death, will be added back in and calculated for IHT payments as if they were still part of your estate.
It’s on a sliding scale after 3 years, so it’s not all or nothing.
- If you live for between 3-4 years after you’ve given away the money – IHT liability reduces by 20%
- 4 – 5 years – a reduction of 40%
- 5 – 6 years – a reduction of 60%
- 6 – 7 years – a reduction of 80%
Can you give away your house?
If you sign over your house but remain living in the property (without paying full market rent), this transfer would be treated as a “gift with reservation of benefit”. By HMRC. This means you reserve the right to benefit from the property, and it has not really left your estate. In this situation, the value of the house will remain part of your estate calculation on your death, even if you live beyond seven years, you will not reduce your IHT liability. In addition, since April 2017, any property that is passed over as a gift during your lifetime, will not benefit from the extra ‘Residence Nil Rate Band’ so this may actually create more IHT liability rather than less!
You can gift a property that you do not live in, say a buy-to-let property as an outright gift, but you also need to give up up any right to receive rental income or a share in the proceeds, and you will need to survive for 7 years for the gift to be outside your estate.
What about avoiding care fees?
Even if the value of your estate is not liable for IHT and you sign over your house but remain living in the property, if you do this with the aim of avoiding paying any future care fees, then this is classed as “deliberate deprivation of assets” and your estate is still liable to pay care fees. There is no time limit for this, so the 7-year rule does not apply. (Local Authorities can investigate this as far back as they feel necessary).
Is there more you can do to reduce Inheritance Tax?
Quite possibly. A discussion with an estate planner or IHT specialist can help by putting plans in place now to reduce all or some future Inheritance Tax.
* NRB is currently £325,000 each. For a married couple (not for co-habiting couples), the NRB is transferrable to the spouse (ie., £650,000 on 2nd death). Plus, since 2017 there is an additional Residence NRB for the main residence passing to direct descendants (of £100,000 increasing until 2020).