You will need to include in your valuation any assets given away by the deceased person in the seven years prior to their death. Assets given away at any time in which they retained an interest or made into a trust will also need to be included.
These gifts or transfers of assets are ones not covered by the deceased person’s will and will need to be declared by you.
In each case the value of the gift or asset transferred is usually the amount it was worth when it was made.
How the seven year rule works
Any assets given away will not be included provided the deceased person lived for seven years after making the gift. Such a gift is described as a ‘potentially exempt transfer.’
If they died within seven years of the gift and its value is less than the inheritance tax threshold, then the value will be added to the estate and any resulting tax liability paid from the estate.
On the other hand, if the gift has a value of more than the Inheritance Tax threshold then Inheritance Tax will be due on it and this will need to be paid by either the beneficiary of the gift or by the estate.
If the death took place between three and seven years after the gift was made and the asset was worth more than the inheritance tax threshold then the amount of inheritance tax due will be reduced or ‘tapered’ using a sliding scale.
Retained interest in a gift
If a gift was made but the deceased person retained an interest in it then this will not be accepted as a potentially exempt transfer. For example of this would be where the deceased person gave away a house but continued to live in it rent free.
In this case you will need to include the full value of the asset in your valuation.
Gifts which are always exempt
You won’t need to include gifts made by the deceased person at any time if made to their spouse or civil partner (with the proviso that the recipient has a permanent home in the UK).
Gifts made to most charities, national institutions (such as museums) and large UK political parties are also always exempt.
A total of £3,000 of gifts can be made by a person in each tax year without incurring inheritance tax.
Any unused part of this £3,000 exemption can be carried forward to the following year but no further.
Other exemption gifts
Some wedding gifts are exempt as are small gifts of £250 or less. Also exempt are regular gift payments (of any amount) made by the deceased to people as part of their normal expenditure.
These gifts do not count towards the annual exemption limit of £3,000
Gifts made into trust
You should note that gifts made into trust are not generally be exempt and will need to be included in your valuation.
Dealing with the valuation of assets put into trust can be complicated and professional advice may be required.
You can call the Probate and Inheritance Tax Helpline on 0300 123 1072. The helpline is open from 9am to 5pm Monday to Friday (closed on bank holidays).
To access the HM Revenue & Customs Inheritance Tax Manual, please click here.
Need for documentation
HM Revenue & Customs will want to see detailed documentary proof of any gifts on which you are claiming exemption from inheritance tax.
Please note that information which we provide through Lasting Post is in outline for information or educational purposes only. The information is not a substitute for the professional judgment of a solicitor, accountant or other professional adviser. We cannot guarantee that information provided by Lasting Post will meet your individual needs, as this will very much depend on your individual circumstances. You should therefore use the information only as a starting point for your enquiries.