Jane Burbidge of Forbes solicitors explains the complex rules around lifetime gifting and how it may reduce the amount of inheritance tax you pay
Inheritance tax (IHT) is a tax on the estate (property, money and possessions) of someone who has died, it can also be payable when making certain lifetime gifts. Most people who think their estate would be liable to IHT want to pay the least amount of tax possible when they die and want to look at what they can do to achieve that, not only in their Wills but also during their lifetime.
For most people the two main ways of reducing their estate for IHT purposes on their death are to either spend more or make gifts. Whilst spending more sounds like a fun way of reducing your estate, it can be quite difficult – strange as it may seem, a lot of people say they aren’t actually very good at spending money – making gifts to their loved ones however is a different matter.
Making lifetime gifts may reduce the amount of IHT payable on your death. However, there are specific rules which must be followed and criteria to be met in order for the gift to be effective for IHT purposes.
There are a number of gifts which can be made which are free of IHT immediately. Everyone can make gifts of up to £3,000 every year. You can also make regular gifts out of income, provided you have established some element of regularity or pattern of giving and you still have sufficient income to maintain your usual standard of living, then the gifts will be entirely exempt. Other gifts to individuals are potentially exempt transfers (PETs). These gifts can be of any amount and if you survive seven years after making the gift, it becomes exempt from IHT.
Gifts to trusts can be a useful tax planning exercise where you do not wish to pass over complete control of an asset, for example to a child or vulnerable person. Such gifts are immediate chargeable transfers and may face an immediate charge to IHT (at reduced lifetime rates) as soon as you make the gift and a further charge if you die within seven years.
The tax rules surrounding gifts and IHT are complex and there are various traps to avoid.
If you give an asset away but still receive a benefit from it – for example if you give your house to your children but you continue to live there rent-free, the reservation of benefit rules apply and you may still be treated as owning the property when you die.
There are complex pre-owned asset income tax rules which may take effect where the reservation of benefit rules do not apply. For example, if you sold your house, gave the proceeds of sale to your child, your child then buys a house and you later live in that property, you may be subject to an income tax charge on a deemed market rent.
If you give an asset away and later require residential or nursing care, the local authority may look to apply the deprivation of asset rules when carrying out a financial assessment to determine your contribution to the cost of your care. If it can be proved that the main reason for making the gift was to avoid paying care fees, you may be treated as if you still owned that asset for the purpose of the financial assessment.
A gift of assets such as shares or a holiday home for example would be a disposal for capital gains tax purposes. If the value of the asset has increased since you acquired it, you could be subject to an immediate charge to tax.
Lifetime giving can reduce the IHT payable on death so that your loved ones inherit the maximum amount from your estate. However, you need to ensure the gifts have the desired effect and do not create unforeseen issues and additional tax liabilities.
To discuss lifetime gifts, please contact Jane Burbidge: firstname.lastname@example.org or contact 01772 220022