HMRC has clarified an important tax-free rule after a customer asked for guidance. The taxpayer had received an £100,000 gift from their sibling and wanted to know what taxes would apply to the amount.
They queried: “Do I have to declare in the tax return? Or this money will be considered as tax free after seven years?” The seven-year rule they are likely referring to here is the fact that for inheritance tax purposes, you can give away a gift and if the person who gave the gift lives for another seven years, this amount is exempt from inheritance tax.
There are also yearly allowances for how much you can give tax-free, but if you want to give away a larger amount, the seven-year rule will apply, and you can gift any amount.
HMRC said in response: “There is no limit to how much cash you receive as a gift for income tax purposes as long as it’s not related to employment.” The tax authority also directed the person to the Government advice page about inheritance tax.
Another important rule to note when giving away an amount subject to the seven-year rule, is that even if the person dies before the seven years is up, the amount may be taxed at below the standard 40 percent rate. This is because the tax rate for the gift tapers off in stages as the seven-year mark approaches.
This is how the tapered rate works depending on how many years has passed since the gift was given:
- 3 to 4 years – 32 percent
- 4 to 5 years – 24 percent
- 5 to 6 years – 16 percent
- 6 to 7 years – 8 percent
- 7 years or more – zero percent.
Some important changes to inheritance tax were announced in Rachel Reeves’ Budget last week, the first from the new Labour Government.
From April 2027, pensions will become subject to inheritance tax, a change which will cause as a “fundamental shift” in estate planning, experts have warned.
Mike Ambery, retirement savings director at Standard Life, part of Phoenix Group, said: “Pensions have been seen as useful tool for estate planning and there will be individuals and families who have approached retirement and estate planning based on existing rules.
“Now, the value of pension pots will be added to the total value of other assets and if over the IHT threshold of £325,000, aside from other exemptions, will be taxed in the same way.”
Each person gets an individual nil-rate allowance, of £325,000 worth of total assets they can pass on tax-free, plus a £175,000 allowance when passing on your main home to a direct descendant.
You can pass on any unused allowance to your spouse or civil partner when you die, meaning they will have a nil-rate allowance of up to £1million when they die.
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