Lifetime Gifts

Preserving wealth for future generations is often a concern, however your priority should be ensuring you have enough funds available to you during retirement to provide the standard of living you require.

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How do lifetime gifts work?

Once you have the appropriate finances in place you should start to consider your options for inheritance tax (IHT) planning.

Gifts made between a spouse or civil partner are free from inheritance tax. Allowances are also transferable to partners, meaning that when one partner dies their personal IHT allowance and nil rate residence band are passed on to the surviving partner.  This enables future beneficiaries to benefit from the couple's combined allowance and nil rate residence relief.

A couple is able to pass on up to £1,000,000 tax free providing the estate includes property valued at £350,000 or more which is being left to their descendants.

Exempted gifts

There are several gift exemptions that can also be used:

Annual exemption – You can gift up to £3,000 a year which will be exempt from your estate. You can also carry an unused exemption forward to the next tax year, raising the amount to £6,000 in the next year. You cannot carry forward any more than one year's annual exemption.

Wedding gifts – Up to £1,000 per person can be gifted as a wedding or civil ceremony present per person, £2,500 can be gifted to a grandchild and £5,000 to a child. 

Regular gifts out of income – Providing you are able to maintain your usual standard of living after making the gift. The gifts need to be regular and should not deplete your capital - see below.

Charitable and political donations - Gifts to uk registered charities and qualifying political parties are inheritance tax free.

The seven year rule

A lifetime gift is treated as potentially exempt for IHT purposes. Provided the donor survives seven years from the date of the gift, it will be excluded from their estate on death.

Taper relief is available where the donor survives at least 3 years  but this is only available to reduce the effective tax rate charged. As most gifts will be less than the nil-rate band, there would be no tax on the gift, and therefore, no taper relief. This will simply result in a reduction in the available nil-rate band to set off against the rest of the estate.

How does tapered inheritance tax relief work?

Years between gift and death % tax paid
Less than 3 40
3 to 4  32
4 to 5 24
5 to 6 16
6 to 7 8
7 or more

It needs to be remembered that the taper relief applies only to the tax payable and not the value of the gift.

Gifting from surplus income

A valuable exemption from IHT applies to gifts made from surplus income. Exactly what is classed as income is crucially important to this rule.

Gifts must be from income and cannot be from capital. Income from employment and rental income qualify, as does income from a final salary pension and dividends from investments. Amounts generated from the sale of investments or withdrawals from investment bonds do not qualify as income for this purpose.

A gift is exempt from IHT provided each gift can be evidenced as follows:

  • That it was made as part of your normal expenditure
  • That, taking one year with another, it was made out of your income
  • That, after allowing for all gifts forming part of your normal expenditure, you were left with sufficient income to maintain your standard of living

A gift must meet all the above conditions to qualify for the exemption. There are no limits as to how much of your surplus income can be gifted away annually. 

Any gift must form part of an observable regular pattern, should HMRC decide to audit any records. As such, it is important to keep a clear record of all gifts. As the exemption is only claimed on death, this will be helpful to the executors of your estate who will be required to complete an IHT 403 form and provide details of all gifts and transfers of assets.

Be careful when gifting non-monetary assets as this can create a Capital Gains Tax liability. Please take professional advice first.

If you are interested in becoming a client of Morris Crocker, contact us on 023 9248 4356 or alternatively you can complete the request a quote form opposite.

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