Lifetime gifts can not only be a valuable tool for reducing inheritance tax (IHT), but also handy for providing financial support to loved ones.
However, the rules surrounding these gifts can be complex. Understanding their implications is crucial for effective planning.
What Are Lifetime Gifts?
In the context of IHT, a lifetime gift refers to any transfer of money, property or assets made during an individual’s lifetime rather than as part of their estate after death. These gifts are often made to reduce the value of the estate, thereby lowering potential IHT liabilities. However, not all gifts are immediately exempt from IHT, so understanding the rules is essential to avoid unexpected tax consequences.
The Seven-Year Rule
A key consideration for lifetime gifts is the seven-year rule. If a gift is made more than seven years before the donor’s death, it is generally exempt from IHT. Gifts made within seven years may still attract IHT, depending on how close they were to the donor’s death.
The tax liability decreases on a sliding scale known as “taper relief.” For instance:
- Gifts made within 3 years: full IHT at 40% is payable by the recipient
- Gifts made between 3 and 7 years: Reduced IHT rates apply on a sliding scale
Annual and Small Gifts Exemptions
To encourage smaller, regular gifting, the government allows certain gifts to be made annually without incurring IHT:
- Annual exemption: Individuals can gift up to £3,000 per tax year, with unused allowances carried forward for one year – but one year only.
- Small gifts exemption: Gifts up to £250 per recipient annually are IHT-free, provided the recipient does not also benefit from the annual exemption.
Exemptions for Specific Types of Gifts
Some gifts are fully exempt from IHT regardless of their size or timing:
- Spousal or civil partner gifts: Transfers between spouses or civil partners are exempt, provided both are UK domiciled.
- Charitable donations: Gifts to registered charities are IHT-free and may provide tax relief.
- Wedding or civil partnership gifts: Exemptions apply depending on the relationship, such as £5,000 for parents or £1,000 for others.
Potentially Exempt Transfers (PETs)
Most lifetime gifts are classified as Potentially Exempt Transfers (PETs). These gifts are exempt from IHT if the donor survives for seven years after making them. If the donor passes away within this period, the gift’s value may be included in their estate, subject to taper relief.
Considerations for Gifting Assets
When gifting assets, it’s essential to consider any ongoing benefits retained by the donor. For example, living in a property that has been gifted without paying rent may render the gift part of the donor’s estate under the “gift with reservation of benefit” rules. Additionally, certain gifts, such as property, might trigger capital gains tax (CGT).
Professional advice is invaluable for navigating these complexities and ensuring compliance with tax regulations.
Is it the right time to be gifting?
Lifetime gifts offer an effective way to reduce IHT liabilities while benefiting loved ones. Understanding the seven-year rule, exemptions and the other IHT provisions can help individuals make informed decisions that align with their estate planning goals.
Seeing your loved ones benefit carries far more emtional value during lifetime than any gift from a deceased’s estate, but seek our guidance. We can help to minimise the risks attached to lifetime gifts, whilst maximising the benefit for you and your loved ones now.
So why leave it too late to make gifts to your loved ones? Contact us below for more help.