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Sean McCann, of the wealth manager NFU Mutual, said the seven-year rule was yet another way in which inheritance tax had become “fiendishly complicated”.
“It frightens people,” he said. “And it has become a more pressing problem for families, we see the numbers creeping up all the time.
“The tax is very complicated so there are a lot of misconceptions about how it works. For example, most people think if they give away money and die before the seven year limit, they will still get a ‘tapering relief’, but that is not how it works.”
If individuals make a gift and then die within seven years, its value eats into the £325,000 tax free allowance. This means the full allowance may not be available on death, and the estate may pay more tax as a result.
The tapering of the tax only applies if the individual gives away more than £325,000 in the seven year period.
Mr McCann added once an individual makes a gift, they must not receive any interest from the asset.
“For example, if you give a holiday home to your children, you cannot still get two weeks free to stay there every year. That is carving out an interest for yourself.
“Another common mistake is giving away a share portfolio, but still wanting the dividends to live on. Or giving away a buy-to-let property, but still receiving the rent. These will not count.
“You have to be very careful about record keeping when navigating this tax.”
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