Regular readers of the weekend financial pages will be familiar with top-tips features explaining how to reduce inheritance tax bills.

Unfortunately, one of the most useful tools, gifting and surviving for seven years with a sliding scale of taper relief between years three and seven, is regularly misunderstood by some in the industry and often misrepresented in print.

Inheritance tax is notoriously complex and the seven year gifting rule is no exception.

The principle is simple enough: seven years is regarded by parliament as being a sufficient period of time to prevent people playing the system by giving away assets at the last minute, however, it is the interaction of the taper relief provisions with the application of the Nil rate band (NRB) which can produce a counter-intuitive and often misunderstood result.

As is well known, everyone has an NRB of £325,000, plus potentially a further £175,000 to be set off against the value of their home.

But, if having made a gift the gifter passes away before the seven year period has expired then the NRB will firstly be set off against the life time gift ahead of the rest of the estate with the gift only being taxed insofar as there is a balance left over, and it is only at this point that taper relief is applied.

So, in practice, taper relief (year 3 – 4: 20%, year 4 – 5: 40%, year 5 – 6: 60% & year 6 -7: 80%) is only of benefit where the sums being gifted are in excess of £325,000.

The major concern here is that those who can least afford it may be encouraged into giving away assets and reducing their standard of living towards the end of their lives on the basis of a false belief.

Not only that, but there is also the possibly unintended consequence that the recipient of the lifetime gift takes tax free with the whole tax burden simply being shifted onto the beneficiaries who take under the Will or on intestacy.

Inheritance tax planning has many traps for the unwary and it is always advisable to take professional advice from a lawyer or accountant.

If you would like to discuss an inheritance tax issue please contact either David Maxwell at [email protected] or Rashid Azizi at [email protected]