Why you need to know about the UK Inheritance Tax 14-Year Rule
January 18, 2024
By Jessica Cook
Most of us have heard about the 7-year gifting rule in relation to UK IHT planning. But the ‘7-year rule’ isn’t the whole picture. You need to know about the ’14-year rule’ Here’s why:
Few areas of tax planning create as much confusion as the inheritance tax ’14-year rule’
In the realm of tax planning, we often hear about the seven-year rule. It’s a common principle in the UK’s Inheritance Tax (IHT) system. Gifts made seven years before one’s demise are generally exempt from IHT. But let’s delve deeper into the less talked about ’14-year rule’.
The 14-year rule isn’t a standalone regulation. Rather, it’s an extension of the seven-year rule. Its purpose is to look back at gifts given within seven years prior to other gifts given in the seven years before death. A mouthful, isn’t it?
Without careful planning, the 7-year rule can become the 14-year rule. This happens when a person has made a gift to a trust (a ‘chargeable lifetime transfer’ or ‘CLT’) and, less than 7 years later, makes a gift to an individual (a ‘potentially exempt transfer’ of ‘PET’).
If that person dies within 7 years of having made the PET, then both the original gift to trust and the subsequent gift to the individual are added back on to the total estate for IHT purposes.
This happens because the IHT nil rate band (£325,000) is set against the gifts in chronological order. Until the first 7-year period (immediately after the original CLT) has expired, the gifter’s IHT nil rate band has not ‘refreshed’ and is therefore not available to be set against the second gift, the failed PET.
When calculating IHT and considering gifts, we need to look at each lifetime transfer in turn, Each transfer is looked at as a separate calculation, each time using the current nil-rate band and any available transferable nil-rate band. However, the RNRB cannot be used.
Let’s put this into context.
Imagine you made a gift in Year 1, and another in Year 8, and you pass away in Year 14. The gift made in Year 8 falls into the seven-year rule and could be subject to IHT. The gift from Year 1, though outside the seven-year rule, will be taken into consideration when calculating the tax on the Year 8 gift. That’s the 14-year rule in action.
Why is this important? This rule can impact the tax relief received on earlier gifts. Therefore, it’s crucial to plan and strategise your gifts with this rule in mind.
So next time you discuss the seven-year rule, remember its lesser-known cousin, the 14-year rule. It might just save your beneficiaries a tidy sum in IHT.
Did you know, that in the UK, gifting out of surplus income is a powerful strategy to mitigate Inheritance Tax (IHT) without the 7-year rule?
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