A brief guide to lifetime gifting

A brief guide to lifetime gifting

With the Nil Rate Band and Residence Nil Rate Band being fixed at their current rates until 2030, and with property values continuing to rise, more people are likely to end up with a taxable estate when they die.
If this is something you’re concerned about, you can take steps now to mitigate the potential Inheritance Tax payable on your estate by making lifetime gifts.

What counts as a lifetime gift?
A lifetime gift is anything that you transfer to a beneficiary during your lifetime, rather than under your Will. Although often cash, a lifetime gift can be anything that has value. This could be jewellery, furniture, shares in a company or even property.

What are the benefits of lifetime gifting?
Lifetime gifting, if used correctly, can be an extremely useful estate planning tool. By taking advantage of the allowances available, you can reduce the value of your estate so that your estate pays less Inheritance Tax when you die.

For some people, the reduction in Inheritance Tax is a bonus, and their goal is to provide for family, such as helping a child or grandchild towards a house deposit. Lifetime gifting, rather than gifting under your Will, means that you get to see your loved ones benefit from the gift.

What allowances are available and how much can I gift?
There are several allowances available, some are available to everyone, and others are available only in some circumstances.

1. The Annual Exemption (available to everyone)
   You can make gifts of up to £3,000 per tax year free of Inheritance Tax. This can be one larger gift of £3,000, or several smaller gifts across the tax year to the same person or spread between different people. It’s important to remember that this is £3,000 per tax year in total, not £3,000 per person.

If you don’t use your whole allowance in one year, you can bring what’s left forward to the next tax year, but only when you’ve already used the current year’s allowance. You can only bring the unused allowance forward to the next tax year, so if you don’t use it, you lose it.

2. Small Gift Exemption (available to everyone)
   Good news for those with large families, you can give as many gifts of up to £250 per person as you want in a tax year, so long as you haven’t used another allowance on the same person. This can be one gift of £250, or several smaller gifts, so long as the amount to one person doesn’t exceed £250.

3. Wedding and Civil Partnership Gifts
   The clue is in the name, but this exemption is only available when the recipient is going to get married or enter into a civil partnership. The gift must be made before the big event, not after, and the wedding must go ahead.

There are rules on how much you can give to different relations:

1. £5,000 to a child;

2. £2,500 to a grandchild; and

3. £1,000 for anyone else.
   This exemption can be used alongside the annual allowance, so if you’re feeling particularly generous you can give the wedding gift above, together with the £3,000 annual exemption in the same tax year.

4. Gifts to Charities (available to everyone)
   Just like leaving gifts to charities in your Will, any gifts made to charities during your lifetime are exempt from Inheritance Tax.

5. Normal expenditure out of income
   Potentially the most useful option if you have an excess of income. Under this exemption you can gift as much as you want, provided certain criteria are met.

The gifts must be regular, made out of income only, and you must be able to maintain the same standard of living after making the gifts.

It’s important to keep good records of your yearly income, expenditure and the gifts you’ve made over the year, as your executors will have to provide a summary to HMRC to claim this exemption.

6. The seven-year rule
   If you make a gift that doesn’t fall under the above allowances, provided you survive seven years from the date of the gift, it will generally be excluded from your estate for Inheritance Tax purposes. If you don’t survive seven years, then the value of the gift will be brought back into your estate, and Inheritance Tax may be due on the gift.

What should I consider before making a gift?
If you’re planning on making lifetime gifts, you should make sure that any gift does not jeopardise your own financial security. There are rules around benefiting from assets that you’ve given away which might remove any Inheritance Tax benefits completely, and there could be other tax consequences depending on the asset gifted, so it’s important to take advice before you make any major decisions.

What can I do now?
The above provides a brief summary only, and if you’d like to carry out some estate planning, it’s a good idea to take advice from a professional who can fully discuss your circumstances and what you’d like to achieve.

How Hay & Kilner can help
At Hay & Kilner, our Private Client team regularly advises families and individuals on inheritance, wills, trusts, and estates. If you have any questions about lifetime gifting please contact Alexis Wood or another member of out experienced team.