Many people make gifts during their lifetime to provide for their loved ones and to also potentially reduce their Inheritance Tax (IHT) liability. Gifting can include, but is not limited to, a gift of cash, property, or a gift of an item such as household goods.
Benefits of lifetime gifting
Decreasing your IHT liability
One of the most significant benefits of lifetime gifting is you could potentially reduce your IHT liability. Gifting can reduce the value of your estate which in turn reduces the IHT payable in future. Gifting can even reduce the overall value of your estate to below the IHT threshold which currently stands at £325,000, and subsequently this would result in no IHT being payable.
Annual Allowance
Everyone is entitled to give away a total of £3,000 each tax year without an IHT liability. If this £3,000 allowance is unused then it can be added to the allowance for the following year so you could have an allowance for £6,000 for the year.
Small Gift exemptions
You can give away as many gifts of up to £250 to as many individuals as you want, provided that they have not received a gift of your whole £3,000 annual exemption. These gifts will be exempt from IHT.
Wedding Gifts
Wedding gifts are exempt from IHT, however there are different allowances:
- Up to £5,000 for a child;
- Up to £2,500 for a grandchild or great-grandchild; and
- Up to £1,000 for any other individual.
Regular expenditure out of normal income
If your income is sufficient to maintain your normal standard of living, you can make gifts from your surplus/excess income. Gifting in this way requires you to carefully document the gifts to prove they are regular and made from excess income. The rules on this exemption can be complex so it is recommended that you take advice if you wish to use this exemption.
Important points to consider regarding lifetime gifts
The 7 Year rule for gifting
No IHT is due on gifts if you live for 7 years after giving them. However, if you die within 7 years of gifting an asset to an individual, the 7 year gift rule means that the beneficiary may be required to pay IHT.
Gifts with a reservation of benefit
A gift with a reservation of benefit means that if something has been gifted but the person making the gift continued to benefit from it or to use it, they would be considered to be reserving a benefit. These types of gifts would be viewed as forming part of your estate for IHT purposes and would therefore not reduce the size of your estate.
Seeking professional advice on lifetime giving
It is advisable to obtain legal financial advice before you consider making significant lifetime gifts as the rules on exemptions can be complex and also there may be other tax aspects to consider such as Capital Gains Tax.
If you would like to discuss gifting during your lifetime and general estate planning, please contact a member of our Private Wealth Team.
