According to recent research, the amount of Inheritance Tax (IHT) paid on gifts rose by \u00a313 million when compared to the previous year.<\/p>\n
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Many people incorporate lifetime gifts to loved ones into their estate planning, with the goal of reducing their taxable estate.<\/p>\n
However, confusion around the \u2018seven-year\u2019 rule and Potentially Exempt Transfers (PETs) can result in families inadvertently paying more tax.<\/p>\n
The uptick in IHT indicates that lifetime gifting should be approached carefully, as assets are not guaranteed to fall outside an estate.<\/p>\n
Many outright gifts to individuals are classified as PETs for IHT purposes. If a donor survives seven years from the date of the gift, it falls entirely outside the scope of IHT.<\/p>\n
The clock starts when a gift is actually made, not when it was promised or merely intended.<\/p>\n
If the donor dies within seven years, the gift may then be subject to IHT, although a taper relief may apply.<\/p>\n
Taper relief is only applied to the portion of a gift that surpasses the donor\u2019s nil-rate band of \u00a3325,000. It only reduces the rate of tax and not the value of the gift itself.<\/p>\n
The relief is applied in line with how long the donor survived after a gift was made:<\/p>\n
Aside from the seven-year rule, individuals can benefit from the annual gift exemption, which allows tax-free gifts of up to \u00a33,000 to be made every year.<\/p>\n
These gifts are immediately exempt from IHT, without the need to survive for seven years after they have been made.<\/p>\n
While using PETs as part of estate planning can be highly effective in reducing a tax bill, it is not without associated risks.<\/p>\n