Lifetime Gifts and Inheritance Tax – The Basics

Introduction

Many people know a little about the “Seven Year Rule” relating to gifts made during your lifetime (rather than after your death under your Will or intestacy). Such gifts are known as Potentially Exempt Transfers (PETs) because if you survive at least seven years after making the gift, there is no Inheritance Tax payable. There are, however, some conditions.

Potentially Exempt Transfers

If you make a lifetime gift but die within seven years, the gift counts towards the calculation of Inheritance Tax (IHT) on your estate. The gift will use up the first part of your available Nil Rate Band (the full Nil Rate Band is currently £325,000). If there is IHT payable after using the available Nil Rate Band, the tax payable on the gift will be tapered (progressively reduced) if the gift was made at least three years before death. Please note that the gift is valid (the recipient still owns what was gifted).

Gifts Where You Retain A Benefit

It is important to remember that if you give away an asset but keep some kind of interest in it, such as transferring your property into your children’s names but continuing to live there rent free, this will not be a PET. The value of the asset will still be included in your estate for inheritance tax purposes even if you made the gift more than seven years before death. This is called a gift with reservation of benefit.

If you cease to have an interest in the asset e.g. by moving out of the property or paying a market rent, the seven years will start from that date.

If you are planning to make a gift but retain an interest, you should take specialist advice so that you fully understand what you are doing and its implications for your Will and potential care home fees, in the event that you become unable to live in your own home, as well as other taxes such as Capital Gains Tax (CGT) etc.

Inheritance Tax on Lifetime Gifts

It is important to note that Inheritance Tax is not necessarily a ‘death tax’ and that it may be due on certain lifetime gifts. This is usually where assets are transferred into trust. Such transfers will first use the available Nil Rate band, but anything over that usually carries a ‘lifetime’ charge of 20%. If you die within seven years, your estate then pays the additional IHT. Depending on the asset(s) being placed in trust, there may also be CGT payable.

Finally

This is quite a complicated area and professional advice should be sought. However, large lifetime gifts can also be a very useful and efficient tax planning tool.

Hazel Jones, Solicitor, specialises in Private Client work and is a full member of Society of Trusts and Estate Practitioners and Solicitors For The Elderly. She can be contacted on 01992 422128 or hazel@ghsolicitors.co.uk