Inheritance tax: How to ensure donations are tax exempt via the 7-year rule | Personal finance | Finance
As the inheritance tax threshold is to continue to be frozen at £325,000 until 2026, it is expected that more and more people will be tricked into paying ‘death tax’. Inheritance tax is paid on the estate of a deceased person and is currently paid at a rate of 40% on anything above the threshold, known as the zero rate band, although there is ways to increase this threshold. The value of an estate includes a person’s property, money and possessions.
Britons are often told by experts that they will have to take action if they want to avoid leaving loved ones with a hefty bill when they die.
The usual recommendation is to donate while a person is still alive.
Under the rules, all adults can donate a maximum of £3,000 a year without paying tax. This is called a person’s “annual exemption”.
The £3,000 can be for one person or split between several.
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People can also carry over their unused annual exemption to the next tax year, but that’s only for one tax year.
Couples can combine their allowances, meaning they can give £6,000 tax free.
People can give as many gifts of up to £250 per person as they want each tax year, as long as they haven’t benefited from the £3,000 limit.
Birthday and Christmas gifts given from a person’s regular income are exempt from inheritance tax.
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Parents can gift £5,000 if their child marries, £2,500 to a married grandchild or great-grandchild and £1,000 to another relative or friend.
Along with freebies, Britons will need to be aware of the seven-year rule.
No tax is due on gifts if a person lives seven years after giving them, however, if the person dies within seven years, there is tax payable.
Anything given three to seven years before death is then taxed on a sliding scale known as “conical relief”.
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If something is classified as a qualified gift, it will be included in the value of a person’s estate and tax will be paid on it, regardless of how long a person lives after the gift.
An example of this is if a person gives their property to their children but continues to live there, without paying market rent.
If Britons donate, they are advised to keep detailed records of what has been donated.
This includes a record of what was given and to whom it was given, the value of the gift and the date it was given.