Making Lifetime Gifts
Such lifetime gifts fall into two categories; ‘gifts with exemptions or exempt transfers’ and ‘potentially exempt transfers’ (PETs).
Gifts include:
- money, household and personal goods, for example, furniture, jewellery, or antiques
- a house, land or buildings
- stocks and shares listed on the London Stock Exchange
- unlisted shares you held for less than 2 years before your death
- A gift can also include any money you lose when you sell something for less than it’s worth. For example, if you sell your house to your child for less than its market value, the difference in value counts as a gift.
Exempt Transfers
These are gifts that are made within the exemptions available at the time. Currently these are:
- gifts to spouses and civil partners
- annual exemption – £3,000 can be given away each tax year (and you may roll one year forward so in the first year, you can gift 6k).
- small gift exemption – Gifts of up to £250 each can be made to as many people as the donor wishes, provided no other gifts were made to these recipients.
- wedding and civil partnership gifts – These gifts are subject to limits depending on the relationship with the recipients and can range up to £5,000.
- regular gifts made out of excess income – Such gifts must be made on a regular basis and must leave sufficient income for the donor to maintain their usual standard of living.
- gifts to charities
Potentially Exempt Transfers (PETs)
These are gifts made during your lifetime that do not fall within the above exemptions. Lifetime gifts use up your IHT threshold first, and any gift you make over this becomes potentially liable to IHT.
If you die more than 7 years after making the gift, they are no longer considered for Inheritance Tax (have become exempt).
However, If you die within 7 years of making the gift, the gift is chargeable to IHT (subject to allowances) but the amount you pay is tapered down:
- Gifts made less than 3 years ago = 100% of the inheritance tax is payable on the gifts – 40%
- Gifts made 3-4 years ago - 80% of the inheritance tax is payable on the gifts – 32%
- Gifts made 4-5 years ago - 60% of the inheritance tax is payable on the gifts – 24%
- Gifts made 5-6 years ago- 40% of the inheritance tax is payable on the gifts – 16%
- Gifts made 6-7 years ago - 20% of the inheritance tax is payable on the gifts – 8%
- Gifts made 7+ years ago - No inheritance tax is payable
This can be a very tax efficient way to reduce your estate.
Things to bear in mind….
Giving gifts you still benefit from
If you give something away but still benefit from it (a ‘gift with reservation’), it will count towards the value of your estate. Gifts with reservation include:
- giving your home to a relative but still living there
- giving away a caravan but still using it for free for your holidays
- giving away a valuable painting but still displaying it in your house
Other taxes:
Also bear in mind that depending on what you are gifting there may be other taxes, eg Capital Gains Tax to pay on property.
Payment of the Tax
If you give gifts that are over your IHT threshold, it is the person who received the gift that would be liable to pay the tax, not your estate.
Example
John died on 30th February 2021. He was not married or in a civil partnership when he died. He gave 3 gifts in the 9 years before his death:
- £50,000 to his sister 8 years before his death
- £325,000 to his brother 3 years and 6 months before his death
- £100,000 to his nephew 3 years before his death
There is no Inheritance Tax to pay on the £50,000 gift to his sister brother as it was given more than 7 years before he died.
There is also no Inheritance Tax to pay on the £325,000 he gave his brother, as this is within the Inheritance Tax threshold.
But his nephew must pay Inheritance Tax on his £100,000 gift at a rate of 32%, as it is above the tax-free threshold and was given 3 years before John died. The Inheritance Tax due is £32,000.
John’s remaining estate is valued at £400,000, so the estate would pay Inheritance Tax of 40% on £400,000 (£160,000).
If you have any questions regarding the planning of your estate, please make an appointment to see us. Initial appointments are free, with no obligation to proceed.