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Inheritance Tax and Lifetime Gifts: What You Need to Know

3 minute read

Wills, Trusts and Probate

Kerri Campsall
Inheritance tax

When it comes to estate planning, many people focus on what happens after they pass away but giving away assets during your lifetime, i.e. lifetime gifts, can play a key role in reducing your Inheritance Tax (IHT) liability. However, the rules can be complex, and mistakes can be costly.

A lifetime gift is simply the transfer of money, property or other assets to another person while you are still alive, without receiving full market value in return. Common examples include:

  • Giving money to children or grandchildren
  • Transferring shares or property
  • Paying for a relative’s wedding or education

 

Lifetime Gifts Exempt from IHT

1. Annual Exemption

  • Each individual can give away up to £3,000 each tax year.

 

2. Small Gift Exemption

  • You can give up to £250 per person per tax year to as many people as you like as long as the recipient hasn’t received any part of your annual exemption.

 

3. Gifts on Marriage or Civil Partnership

You can give a lump sum as a wedding or civil partnership gift which would be free of Inheritance Tax if made before the ceremony.  These gifts can be up to a value of:

  • £5,000 to a child
  • £2,500 to a grandchild or great-grandchild
  • £1,000 to anyone else

 

4. Gifts Out of Surplus Income

  • If you regularly give gifts from income, not capital, and you maintain your usual standard of living, these may be fully exempt from IHT.
  • HMRC may ask for evidence, so good record-keeping is essential.

 

5. Gifts to Charities or Political Parties

  • Lifetime gifts to UK-registered charities or qualifying political parties are fully exempt from IHT.

 

The Seven Year Rule

All other lifetime gifts could potentially be liable for Inheritance Tax depending on how long you live following making such gifts.

Gifts Made Within 7 Years of Death are known as potentially exempt transfers (PETs) and  may be subject to IHT depending on the value of the gift, the timing, and whether you’ve used up your nil-rate band. If you die between 3 and 7 years after making a gift, taper relief may reduce the tax due on that gift:

Gifts made more than seven years before your death are usually exempt from Inheritance Tax.

 

Retention of Benefit.

One common mistake people make with estate planning is giving over ownership of an asset continuing to benefit from it, e.g. giving a house to children but continuing to live in it rent-free.  In a situation where you continue to retain benefit from an asset HMRC will treat it as still part of your estate for IHT purpose and to avoid this, you must fully relinquish all benefit or pay market rent for continued use.

 

Record Keeping and Disclosure

If you plan to make use of lifetime gifts as part of your estate planning it is essential to keep detailed records of the dates and amounts of gifts, recipients and any exemptions used.  Your executors will need this information to accurately report gifts when calculating IHT after your death.

While lifetime gifting can be a powerful way to reduce your estate’s IHT liability, the rules are technical and often misunderstood. Poorly timed or structured gifts can lead to unexpected tax charges.  Seeking the advice of a Solicitor can help you use all of your available exemptions without impacting your own financial security.