Lifetime gifting as a means of estate planning
Gifting assets away during your lifetime into trust or outright to individuals has the effect of reducing the value of your estate, as long as you survive seven years from the date of the gift. Should you not survive seven years, the value of the gift is added back into your estate for Inheritance Tax (‘IHT’) purposes.
If the total gifts made in the seven years prior to your death amount to less than the nil rate band (£325,000), no IHT will be due on them but they will have used up apart, if not all, of your nil rate band. If the value of gifts made exceeds your nil rate band, IHT will be payable on the excess but taper relief may be available if you have survived more than three years from the date of the gifts.
These rules apply not only to cash gifts but to all gifts, including gifts of personal possessions, houses and land and shares and investments.
There are certain types of gifts you can make during your lifetime, that will not be subject to the seven-year rule mentioned above. These include:
- Spouse Exemption – unlimited outright gifts to spouses/civil partners are exempt from IHT, providing both parties are domiciled in the UK. The spouse exemption is currently limited to the nil rate band, if the person making the gift is UK domiciled and the recipient is non UK domiciled.
- Charity Exemption – all outright gifts to qualifying UK charities are exempt from IHT.
- Annual Exemption – an individual can give away up to £3,000 each tax year. If not used or not fully used in one tax year, the unused part may be carried forward for one tax year only.
- Small Gift Exemption – gifts of no more than £250 to any recipient per tax year are exempt. The number of individuals is unlimited as long as you haven’t used any other gift allowance on them.
- Wedding and Civil Partnership Gifts – a parent may give £5,000, a grandparent may give £2,500 and anyone else may give £1,000 free of IHT.
- Gifts out of income – any regular gifts made out of excess net income are exempt from IHT. These gifts must not affect your normal standard of living; otherwise HM Revenue & Customs will deny the claim for this relief. For example, if your income is £60,000 per year but you only use £50,000 per year to maintain your normal standard of living, you can gift the balance (£10,000) without it affecting your estate for IHT purposes. However, detailed records must be kept.
Often, if parents have made lifetime gifts to a child, they are concerned about equalising the position for their other children on their death. It is possible to include a clause within a Will to take any lifetime gifts into account.
Another concern that is sometimes raised when lifetime gifts have been made to children, is that if the parent dies within seven years of making the gift and IHT becomes payable on the gift, it is the recipient child who is responsible for paying this portion of the IHT. Again, this can be overcome by appropriate drafting in the Will, to state that any IHT will be paid from the estate instead.
This update is for general purposes and guidance only and does not constitute legal or professional advice. You should seek legal advice before relying on its content. This update relates to the prevailing circumstances at the date of its original publication and may not have been updated to reflect subsequent developments. If you have general queries about our updates, please email: firstname.lastname@example.org