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Inheritance Tax - Tax on gifts within seven years before death

Quite separately from tax on your estate, potentially exempt transfers and taxable gifts you made in the last seven years are reassessed on death and tax (or extra tax) may be due on them. Initially, the person you made the gift to will be asked to pay. If they can’t or won’t, tax is paid from your estate. But taper relief can be claimed to reduce the tax bill if the gift was made more than three years before death (see below). Note that taper relief does not reduce the tax bill on the estate, and will only be useful if the life-time gifts exceed the nil band of £325,000.

Years between gift and death% of inheritance tax payable
Up to 3100%
More than 3 and up to 480%
More than 4 and up to 5
More than 5 and up to 6
More than 6 and up to 7

Inheritance Tax Example

Angela Framing died in May 2010, leaving an estate worth £316,000 (largely the value of her home). In December 1999, she had made a taxable gift of £15,000 to help a grandchild with the cost of studying. Subsequently, in August 2002, she gave another grandchild a taxable gift of £5,000 to start a business.

In calculating the tax due on Angela’s estate, the £20,000 of taxable lifetime gifts is added to the £316,000 left on death to produce a total of £336,000. The first £325,000 of that is free of tax, leaving £336,000 – £325,000 = £11,000 on which tax is due.

Tax at 40 per cent on £11,000 is £4,400 – tax that will be entirely paid out of Angela’s estate, since the life-time gifts are deemed to use up part of the £325,000 before the balance is used to calculate the tax on the estate.

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