‘So few people understand it,’ says the IHT 14-year rule’s proponent.
Despite the fact that the 14-year rule only applies in certain situations, many Britons are caught off guard by this complicated inheritance tax rule.
The 14-year rule in inheritance tax (IHT) basically means that gifts made 14 years ago can be dragged back into the tax equation.
Sarah Coles, Hargreaves Lansdown’s senior personal finance analyst, explained how the rule works and the “horrible surprises” it could bring.
IHT is a complicated topic by nature, and reforms aimed at simplifying it were shelved in late 2021.
In 2018, the Office of Tax Simplification was tasked with reviewing IHT, and only one of its 12 recommendations is expected to be implemented in its first five years.
Over 90% of non-taxpaying estates will no longer be required to file IHT forms for deaths requiring probate or confirmation as of January 1, 2022.
The recommendation to simplify lifetime gift exemptions and change the scope of IHT reliefs was among the other suggestions made.
These aspects of IHT haven’t been updated in three decades, resulting in Britons losing £7,000 due to annual exemption relief that hasn’t been updated since 1981.
If the relief had kept up with inflation, it would now be worth £10,000 rather than the current £3,000.
The current system has also been chastised for taking far too long for large gifts to leave the estate, which is where the 14-year rule comes in.
“Reducing the time it takes for larger gifts to leave the estate from seven to five years was also eminently sensible, as the current system requires too much record keeping and forward planning,” Ms Coles told This website.
“Removing the loophole that allows 14-year-old gifts to be dragged back into the estate would have avoided some horrifying surprises.”
Given the current rule of seven years, if a person dies within seven years of making a large gift, one must also search seven years prior to the original gift.
“It’s when someone makes a gift to a trust, then makes a gift to an individual, and then dies within seven years of giving the gift to the individual,” Ms Coles explained.
“You must then go back seven years before the gift was given to the individual.”
“Brinkwire News in Condensed Form.”