Inheritance Tax: Could the seven-year rule be reduced to five years?

The current ‘seven-year rule’ for Inheritance Tax (IHT) could be cut to five years according to proposals outlined in a review ordered by the Chancellor of the Exchequer.

Under the current rules, if an individual dies within seven years of passing on money, possessions or property to loved ones, then IHT of up to 40 per cent must be paid on the gift.

The Office of Tax Simplification (OTS) has now suggested that the time limit should be changed to five years.

The official review was ordered by the Chancellor, Phillip Hammond, and proposes that the seven-year rule relating to gift-giving should change to five years, which would result in gifts that were made more than five years ago being exempt from IHT.

Under the current system, tax on gifts is charged at 40 per cent on those that were gifted in the three years before the individual dies. Gifts made between three and seven years before death are taxed on a taper relief.

The report also proposed removing taper relief, though it acknowledged this would create a “cliff-edge” at the five-year point, as one day would make the difference between paying 40 per cent tax and nothing at all.

Additionally, the OTS called for the array of gift exemptions to be replaced with a single personal gift allowance, allowing an individual to give up to a fixed amount each year.

Kathryn Cearns, Chair of the Office of Tax Simplification, said: “Although only a small number of people pay inheritance tax each year, a far greater number worry about it.

“The OTS’s packages of recommendations would go some way to achieving the goal of making the tax easier to understand and simpler to comply with.”

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