Households across the UK are being advised to familiarise themselves with the “seven-year rule” as significant changes to inheritance tax are set to take effect under the incoming Labour government led by Prime Minister Andy Burnham and Chancellor John Healey.
From April 2027, private pensions that remain unclaimed will be added to the estate’s value for inheritance tax purposes. Currently, estates valued above £325,000, or £500,000 if a home is bequeathed to children or grandchildren, are liable to a 40% inheritance tax rate. To mitigate this, individuals often use their annual gifting allowances alongside the seven-year rule to reduce the taxable estate.
Speaking on BBC Radio 4’s Moneybox, presenter Paul Lewis noted that inheritance tax is “probably the most hated of all taxes,” despite only about one in every twenty estates being subject to it. He explained, “It’s understandable, I suppose, that people who will pay it will want to minimise the amount the Treasury takes. One way to do it that I sometimes recommend is just to spend it or give it away.”
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On BBC Morning Live, presenter Dan Whitworth offered further clarification: “You can give away money without it counting towards inheritance tax, but there are limits. The main exemption is the annual allowance of £3,000. If this isn’t used in one year, it can be carried forward for one year, allowing a maximum of £6,000 to be gifted tax-free.
“In addition, small gifts up to £250 per recipient each year are permitted provided they don’t overlap with the £3,000 exemption. Wedding gifts have higher allowances: £5,000 for your own child, £2,500 for a grandchild, and £1,000 for others.
“For gifts exceeding these allowances, the seven-year rule applies. If you survive seven years after giving the gift, it’s exempt from inheritance tax. However, if you pass away within seven years, the gift may be subject to tax, though taper relief can reduce the rate depending on how much time has elapsed.”
Whitworth emphasised the importance of record-keeping: “It’s crucial to document any gifts made, including the recipient, date, and amount. Executors will require this information when calculating any inheritance tax liabilities.”
“It’s understandable, I suppose, that people who will pay it will want to minimise the amount the Treasury takes. One way to do it that I sometimes recommend is just to spend it or give it away.”
These upcoming changes underscore the importance of careful estate planning to ensure beneficiaries receive as much as possible while complying with the law.