Inheritance Tax Planning

Inheritance Tax and the 7 Year rule

There is a way that you can give your whole estate away and pay no tax at all. This way has been a managed way of passing large estates down the generations by wealthy families for centuries. This type of transfer is known as a "Potentially Exempt Transfer" or a PET.

In short, wealthy families who have literally large estates would plan to pass the whole estate onto one or two heirs typically eldest son or daughter. This would normally take place when the son or daughter was over twenty one.

Now as long as the parents survived a period of 7 years there would be no tax whatsoever due on that part of the gifted estate.

If they died during the 7 years there would be tax due and this tax would be due according to the calculation below :-

If death occurs within the first 3 years after the transfer there will be 100% of the tax due.

If death occurs between years 3 and 4 then only 80% of the tax will be due

If death occurs between years 4 and 5 then only 60% of the tax will be due

If death occurs between years 5 and 6 then only 40% of the tax will be due

Finally if death occurs between years 6 and 7 only 20% of the tax would be due.

So in summary the tax is still 40% but depending on the year of death after the transfer is made anything from 100% of that 40% to 20% of the 40% may be due, and then obviously if you survive the 7 years then no tax is due at all.

Do not think for one minute that you have to be a wealthy land owner to benefit from the 7 year rule because you don't all you have to have is an estate that carries a potential tax bill and the rest is just good tax planning.

Please take the time to use our calculator below to determine how much tax would be due on a PET after a certain period of time.

Please note that this calculator is only a guide and in no way guarantees the amount of tax that will be due on and potentially exempt transfer. That said it will give you an indication of the amount of tax that should be due. You will need to know what tax would be due at outset in order to calculate the tax due after time.