I think most people understand the seven-year rule when it comes to inheritance tax. If you gift money and survive seven years there is no IHT due. But, as I understand it, there is also a 14-year rule that is a lot more complicated. If another gift is given within the initial seven-year period, then the time can be reset on the initial gift.
It appears this only relates to trusts but it is confusing to say the least. My question is, if a cash gift was made four years ago and the parent wanted to make another now, does the second gift affect the seven-year period on the first gift?
My understanding is that as long as they are purely cash gifts then one doesn’t affect the other for IHT purposes. Is that correct?
Most gifts you make to other people during your lifetime are classified as ‘potentially exempt transfers’ (PETs). This means that if you survive for seven years after making the gift, and there are no strings attached to the gift, no inheritance tax is due.
However, if you die within seven years the PET is subject to inheritance tax at a rate of up to 40% depending on how many years there are between the date of the gift and your death.
Where trusts have been set up, the rules become more complex. Trusts are frequently used by, say, grandparents who wish to ring-fence assets for the future use of young grandchildren; or for divorced fathers who wish to ensure that assets pass to their children and not the man his wife ran off with.
If you die within seven years of establishing the trust, the assets in the trust become taxable, as with any other PET. But, there’s a catch. If you die within seven years, other gifts that were made in the previous seven years before the establishment of the trust, also form part of the calculation for inheritance tax.
In this way, gifts made up to 14 years before death can attract tax. The rules are complex and where you set up a trust, cast-iron tax advice is highly recommended to mitigate any unexpected and unaffordable tax bills.
Where a cash gift was made four years ago and another subsequent to that and there were no strings attached, then the gifts come under the rules of PET. If so, no inheritance tax is due provided you survive seven years after each gift.