What is a Lifetime Gift

With the current Inheritance Tax thresholds being frozen until April 2031, more and more individuals are concerned that their estates will become liable for Inheritance Tax after they pass away.  

An option to mitigate Inheritance Tax liability is to reduce the value of an individual’s estate, and one of the most common ways of doing this is through making lifetime gifts.  

These gifts can be in various forms such as cash, property or stocks and shares.  

Nevertheless, making a lifetime gift could have unintended consequences that may adversely affect an individual’s estate in the future.  

In this article we will explore the advantages of lifetime gifting, as well as key considerations when making lifetime gifts.  

Advantages of making a Lifetime Gift:  

From an Inheritance Tax position, if done correctly, a lifetime gift can reduce the value of an individual’s estate. This could mean that the value of the estate is below the Inheritance Tax thresholds, and no Inheritance Tax would be payable, or that the value of the estate is reduced so that there would be less Inheritance Tax to pay on the individual’s death.   

By paying less Inheritance Tax, an individual can allow for a higher proportion of their assets to go to their intended beneficiaries.  

Considerations when making Lifetime Gifts: 

Spousal Exemptions:  

It is important to note that gifts between spouses are exempt from Inheritance Tax regardless of the amount, provided that the spouses permanently live in the UK. 

Potentially Exempt Transfers (‘PETs’) and the 7 Year Rule: 

A PET is a lifetime gift that is deemed to be potentially exempt from Inheritance Tax. If an individual does not survive for 7 years after making the gift, then their Nil Rate Band allowance is reduced by the value of that gift. If the value of the gift is greater than the available allowance, then Inheritance Tax will be due on the value of the gift over the available Nil Rate Band allowance.  

However, if an individual does survive for 7 years from the date of the gift, there will not be any Inheritance Tax payable on that gift, which is why it is deemed to be a “Potentially Exempt Transfer”.  

Tapering Relief 

If a lifetime gift does become liable for Inheritance Tax, then the rate of the tax chargeable depends on how many years after making the gift the individual survived. 

This is known as “Tapering Relief” and the table below illustrates the varying rates of Inheritance Tax depending on the time between the gift and the individual’s death.   

Exemptions on gifts from Inheritance Tax:  

Each individual has an annual exemption of £3,000 worth of gifts for each tax year, and any unused annual exemption can be carried over to the next tax year, but this can only be done for one tax year.  

Additionally, an individual can make gifts of up to £250 per person each tax year, provided that they have not used one of the other allowances on that person. It is also worth noting that gifts for Birthdays or Christmas are exempt from Inheritance Tax if they are made from an individual’s regular income.  

Furthermore, gifts to someone getting married or entering a civil partnership are exempt from Inheritance Tax. In these situations, an individual can give up to £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to any other person.  

Gift with Reservation of Benefit (‘GROB’):  

One of the most common pitfalls with lifetime gifting is that rather than actually making a gift of an asset, an individual makes a Gift with Reservation of Benefit (GROB). A GROB is where a person makes a gift but still retains some sort of benefit from the asset being gifted.  

Typical examples of GROBs are when parents gift the family home to their children but still continue to live in the property, or they transfer the legal ownership of a rental property to someone else but continue to collect the rental income themselves.    

In these situations, HMRC would not recognise these gifts (or any other type of GROB) as a being valid, and the total value of the asset would count towards the individual’s estate for IHT purposes.  

To make sure that a gift of an asset is not classed as a GROB the individual making the gift needs to make sure that once they gift the asset away, they do not enjoy a benefit from it. For example, if a rental property is transferred into the name of someone else, then that person should be the one receiving rental income.  

For practical purposes it may be difficult for individuals not to benefit from the gifted asset (such as continuing to live in the family home after putting it into the names of their children). In this situation to avoid the gift being classed as a GROB the parents would have to pay their children a fair market rent for the property.  

Conclusions:  

Whilst making lifetime gifts to loved ones can seem like an attractive and simple way of reducing the value of an estate for IHT purposes, there are multiple pitfalls that can easily be fallen into when making these gifts.  

It would therefore be prudent to obtain legal advice to fully consider the impacts of any lifetime gifts you intend to make and our private client team at Ronald Fletcher Baker LLP are fully equipped to support you in this process.