A widely held misconception surrounds the application of the inheritance tax (IHT) seven-year rule, particularly concerning taper relief, according to Sean McCann, a chartered financial planner at NFU Mutual. Many believe that if a gift is made between three and seven years before death, the IHT due automatically reduces on a sliding scale.
However, the reality is that taper relief only comes into effect if the total value of gifts made within the seven-year period exceeds the standard inheritance tax threshold, known as the nil-rate band. This nil-rate band is currently £325,000, an amount that can be passed on tax-free to beneficiaries.
Lifetime gifts first utilise this £325,000 nil-rate band. Taper relief, which offers rates ranging from 32% to 8%, then applies only to the portion of the gift that exceeds this threshold. For example, a gift of £100,000 would typically not incur IHT as it falls within the nil-rate band, assuming no other gifts were made.
The residence nil-rate band, an additional £175,000 for those leaving their home to a child or grandchild, applies only to the remaining estate and not to lifetime gifts. Chris Black, director of wealth management at RBC Brewin Dolphin, confirmed that for gifts made within seven years of death, IHT is determined solely by reference to the standard £325,000 nil-rate band.