Britons warned of inheritance tax rule which could leave ‘nasty surprise’

Britons are being urged to consider the gifting rules as some people are being left with a “nasty surprise” as they did not undertand the complexities of inheritance tax.

Inheritance tax (IHT) is a tax on the ‘estate’ of someone who’s passed away.

The amount one pays depends on the total value of their estate – their property, money and possessions – when they die.

There is an IHT threshold of £325,000, meaning that if the total value of one’s total estate is below that figure then there will be no tax to pay. Anything above this level is usually taxed at 40 percent.

An expert has warned against a compex gifting rule that can leave people with a shock bill after their loved one has passed.

Ian Dyall, Head of Estate Planning at leading UK wealth management firm Evelyn Partners explained that the best time to gift, if someone can afford it, is now.

The earlier one gifts, the more chance there is of that gift becoming fully exempt and not being caught by the seven year rule.

If people survive seven years after giving their gift, it won’t be included in their estate and therefore won’t be subject to IHT.

If people die before the seven years then there might be IHT to pay, but the gifts will be taxed using a sliding scale.

Survive seven years and your gifts won’t be included in your estate and therefore won’t be subject to IHT.

If you die before the seven years then there might be IHT to pay, but the gifts will be taxed using a sliding scale

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Mr Dyall said: “Large gifts can still be effective at reducing an estate’s IHT liability. If you live for at least seven years after making a gift of any size, then those funds – known as ‘potentially exempt transfers’ during that seven-year period – are counted as having left your estate.

Dyall points out that potentially exempt transfers can still reduce the overall IHT due on an estate even if the giver dies with seven years.

He continued: “The IHT rate on PETs that exceed the nil rate band reduces on a sliding scale as time elapses after the date of the gift, so that tax liability could still be reduced.

“On the other hand, a big gift could leave a nasty surprise for beneficiaries who find that they owe tax on it if the gifter does die within seven years.”

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If there were three-to-four years between date of gift and death, the IHT rate lowers to 32 percent, while at six-to-seven years the rate falls to just eight percent.

All of which means that large gifts exceeding the nil rate band can moderate IHT liability even if they fall foul of the seven-year rule.

He warned however that if a gift does become liable for IHT, it is the recipient who will have to pay, and they may not have the resources to meet a surprise tax bill when it arrives, possibly having spent the money.

Mr Dyall said: “A corollary of all this is, that if someone makes a gift of a value below the nil-rate band to one person, and then dies within seven years, then all the beneficiaries of the estate could share the liability on the lifetime gift received by one person.

“The only time, in the main, that a donor will be subject to tax upon a gift during their lifetime would be if they made a gift to a discretionary trust, over the donor’s available inheritance tax nil rate band. “

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