What is lifetime gifting and should I be doing it?
Successful lifetime gifting (also known as Inheritance Tax gifting or IHT gifting) is about timing and understanding the rules. If you wish to help preserve and protect family assets, it might be something you wish to consider, but if you are thinking about making a significant transfer of wealth or assets you may need assistance to ensure you stay within the rules and are not putting your estate or your own financial future at risk.
What are the rules in relation to IHT gifting?
The rules relating to IHT and lifetime gifting are complex and largely revolve around the value of the gift and when it was given away.
The term ‘gift’ is also not as straightforward as it seems. A gift can be a valuable piece of family jewellery, a house, or cash, but gifting also relates to loss of value. So, if you sell an asset to your child for less than it is worth, you are deemed to have gifted the difference in value and this may be taken into consideration for IHT purposes.
While you can give any value of gift to your spouse or partner in your lifetime (as long as they are permanently resident in the UK), if you give away more than £325,000 to children, grandchildren or any other parties in the seven years before your death, they will be charged Inheritance Tax on the value of the gift when you die.
What are Potentially Exempt Transfers (PETs)?
HM Revenue & Customs classes any gift which is valued at more than £3,000 given in a single tax year to another party as a potentially exempt transfer (PET).
You have £3,000 annual exemption and any remainder can be carried forward for one year only.
If you have given a gift valued at more than £3,000 and you die within seven years of transfer, then the recipient may be liable for Inheritance Tax if your total estate is valued at more than £325,000.
There is a sliding scale of IHT to pay depending on when the gift was given. If the gift occurred less than three years before your death the recipient will be required to pay 40% IHT (the standard rate) – for gifts made between three and four years the rate is 32%, at four to five years it falls to 24%, five to six years the rate is 16%, six to seven years the rate is 8%, reducing to zero at seven years or more.
Can I give small gifts or anything else that’s IHT-free?
As long as you have not already given a person your £3,000 annual exemption amount, you can give small gifts to as many people as you wish up to £250 each.
You can also give certain amounts (up to £5,000) in wedding gifts to relatives and friends, but the amount you can give for IHT planning purposes depends on who the person is (child, grandchild, niece/nephew etc.). The gift has to be given prior to the date of the wedding and the wedding must go ahead.
There are also some limited circumstances in which other sums may be considered exempt, such as regular payments into a child’s savings account, paying for a grandchild’s school fees and charitable giving. The rules around such gifts and their qualification as exempt are complex and you should seek specialist tax and legal advice.
Most importantly, keep accurate records of all your gifts and this will help you and your advisers to establish any applicable IHT exemptions.
How might the Bank of Mum and Dad be affected by IHT Gifting rules?
The phenomenon of the Bank of Mum and Dad (BoMaD) has seen hundreds of thousands of parents help their children to afford expensive outlays such as a university education, setting up a business, or getting onto the property ladder.
If you provide financial assistance in the form of gifting money for a mortgage deposit, the joint funding of a property purchase, or the gift of equity in a property already owned, then there could be ramifications at the time of your death. If the gift is given within seven years of your death, your child may become liable for IHT.
BoMaD gifting has several layers of complexity and, if you are considering helping your child with a property purchase, then it’s important you seek advice to ensure that you don’t expose yourself to problems at a later stage.
Can my attorney give gifts on my behalf?
If you have set up a Lasting Power of Attorney (LPA) for your financial affairs, your attorney will have limited powers to make lifetime gifts on your behalf once you lose the mental capacity to be involved in the decision making process. Similar restrictions will be in place for a deputy appointed by the Court of Protection (CoP).
This means that once you lose mental capacity, the ability to carry out effective IHT planning will be severely restricted and any large gift arranged by a deputy or attorney may well be set aside by a court following a legal challenge if the attorney or deputy cannot explain the decision making process or if the CoP did not approve the gift.
Put simply, attorneys and deputies cannot make gifts from a person’s estate, apart from in very limited circumstances such as on customary occasions (small gifts of reasonable value given at birthdays, weddings, religious festivals, etc.) and reasonable amounts of charitable gifting to charities the donor supported.
Special considerations for IHT gifting
As we said earlier, the timing of lifetime gifts is important if they are to be effective in mitigating IHT. However, successful gifting is rarely as simple as “give it away early”.
When planning your gifts, you need to be sure that you can afford to completely relinquish the wealth and/or assets and, particularly when thinking about gifting property, there are strict rules about how you can benefit from an asset once you have gifted it to another party.
If you are unsure about how to begin lifetime gifting, what the rules are, or if you can afford to start gifting, then Wellers Law Group can help. Please call 01372 750100 for our Surrey office and 020 8464 4242 for our Bromley office today.