If you’re thinking of gifting assets to your family and friends, it can be a good idea to do this during your lifetime. Giving the gift during your lifetime reduces the value of your estate – which, in turn, will reduce what’s later due in inheritance tax (IHT).
Understanding the rules around lifetime gifts helps you plan out your gifts in the most tax-efficient way, while passing on the assets you want to give to your nearest and dearest.
The legislation covers gifts that fall immediately outside of your estate, as opposed to potentially-exempt transfers (PETs). These PETs can be added back in whole, or in part, if you (as the donor) don’t survive for seven years.
Gifts to charities and to political parties fall outside the estate and are ignored for IHT.
Other gifts that fall immediately outside of your estate for IHT purposes fall into three categories. The monetary limits are per tax year.
Gifts of property situated outside of the UK by non-UK-domiciled individuals have no adverse IHT consequences.
This covers gifts to maintain family members and covers spouses, civil partners and minor children (children over 18 if in full-time education). It can also include a dependant relative who is incapacitated because of illness or age.
Gifts on marriage up to £5,000 (to a child), £2,500 (grandchild or great grandchild) or £1,000 (any other recipient) are free of IHT implications.
Annual gifts not exceeding £250 to any recipient can be made, so this covers things like Christmas and birthday gifts. These gifts cannot be increased by using part of the annual exemption.
Other gifts up to a maximum annual exemption of £3,000 in total can be gifted each tax year. Any of the previous year’s allowance that was unused can be utilised in the following year, after the current year’s allowance is used.
There is another exemption for ‘normal expenditure out of income’. This has no fixed upper value but the gift(s) must satisfy three conditions:
If you think the total value of your estate may be above the IHT threshold, it’s advisable to talk to us about IHT planning. By putting the right plans in place, you can reduce the IHT impact.
If you’d like to talk about IHT planning, or would like to arrange a review of your particular circumstances, please do contact us for a chat.