Inheritance tax in the UK is currently set at 40 percent of any value of an estate above a particular threshold, usually set at £325,000. The tax provides the government with billions of pounds a year, and so it is vital for HMRC to collect it from all those who are eligible. Studies have found the amount of Inheritance Tax soared to £5.36billion in the 2018/19, which was an increase of £164million from the previous year.
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As the tax bill soars, it is important for Britons to have an understanding of what tax they are set to pay, and how this will affect an estate.
This is particularly true for the executor of a will, who is ultimately responsible for handling the matter after someone passes away.
In this sense, there is one particular rule Britons should pay attention to before their loved one passes away.
Gift-giving could have a significant impact on the amount of Inheritance Tax there is to pay, but there are specific stipulations that must be followed.
Spouses and civil partners are permitted to give each other as many gifts as they like during their lifetime, but there are different rules when giving gifts to others.
Gifts to family, friends and other loved ones are known as ‘potentially exempt transfers,’ meaning they will only be tax-free if a person survives at least seven years after making the gift.
This is known as the seven-year rule and stop people from dodging the tax to ensure fairness.
If a person does pass away within seven years of the gift being given, it will be subject to Inheritance Tax.
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The government considers a gift as anything that has a value, such as money, property or possessions, so it is important to keep track.
Gifts are also deemed as a loss in value when something is transferred, for example selling a house to a child for less than its market value.
Gifts which are made three to seven years before death are taxed on a scale known as ‘taper relief’.
For gifts given less than three years before death, Inheritance Tax stands at 40 percent.
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However, for three to four years before death, the tax stands at 32 percent, reducing to 24 percent between four to five years, and 16 percent from five to six years.
Those who just miss out, gifting possessions or property between six to seven years before death, will have these gifts taxed at eight percent.
There has been speculation in recent months that Inheritance Tax could rise in order to assist the government in covering increasing spending measures as a result of COVID-19.
Mike Warburton, the tax columnist for the Telegraph described a rise in the tax as “inevitable”.
This appeared to be concurred by the Director of Tax Research UK, Richard Murphy, who told the paper the group wished to see a wealth tax to help fund the pandemic.
However, shortly before the pandemic grasped Britain, an all-party parliamentary group had been campaigning for changes to Inheritance Tax.
The group wishes to axe the seven-year rule, alongside closing other loopholes which they believe see people avoid the tax unfairly.
It was thought the Chancellor Rishi Sunak could include measures to address the perceived problems with IHT in his Budget, however these appeared shelved in favour of coronavirus issues.
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