Lifetime Gifting – How Much Can I Give Away?
One of the most common misconceptions we hear when discussing lifetime gifting as an effective inheritance tax planning tool is that anything you gift, regardless of value, is automatically exempt from inheritance tax. Unfortunately, this is not always the case, although lifetime gifting when considered and used with caution, can be a very effective inheritance tax planning tool.
When considering making lifetime gifts, it is important to always consider the “seven year rule”. Making a lifetime gift triggers this “rule” in that if the donor dies within seven years of making the gift, the value is added back into their estate for inheritance tax purposes. This means that although there won’t be any inheritance tax payable upon the gift being made, there could potentially be tax to pay later if the donor does not survive for seven years. If, however, the donor survives the gift by seven years, then the gift will fall outside of their estate for inheritance tax purposes, making this a very effective way of reducing the value of a person’s estate for inheritance tax purposes.
In addition, there are certain exemptions available to be applied against lifetime gifts which immediately take the gift outside of the inheritance tax regime, and avoid starting the clock ticking on the “seven year rule”. It is therefore beneficial to consider making the most of these exemptions when gifting during your lifetime.
The most commonly known inheritance tax gift exemption is the “annual exemption”, which is the exemption that allows a person to gift a total sum of up to £3,000 per tax year without having to worry about inheritance tax being due on the gift, even if the donor dies within seven years of making the gift. This can therefore be a beneficial way of gifting sums to those you wish to benefit, without it complicating your estate in due course. Please note it is often the case that people think the annual allowance permits them to make gifts of up to £3,000 to an unlimited number of individuals – but this is incorrect. The annual allowance only allows a person to make a total sum of gifts of £3,000 in a tax year (e.g. one gift of £3,000 or two gifts of £1,500 each etc) without the gifts being brought back into account on a person’s estate if they die within seven years.
Other helpful gift exemptions include the “small gifts exemption”, under which gifts not exceeding £250 in total to an individual per tax year are exempt from inheritance tax, as well as gifts made in the course of “normal expenditure out of income”. In respect of the latter exemption, this typically applies to people who have high incomes (and low spending) who can make gifts from excess income without affecting their normal standard of living. If you are considering utilising this exemption we would recommend you take professional advice before doing so. These two exemptions often allow for smaller gifts made at occasions such as birthdays or other celebrations to be exempt from inheritance tax, even if the donor dies within seven years.
Obviously lifetime gifting is very personal to the financial circumstances of the individual and the starting point is that a person should only gift what they can afford to gift. However, gifting is an important element of inheritance tax planning, but particularly when a person has a very large estate the above exemptions may not be that successful at reducing the value of the estate for inheritance tax purposes, meaning that a more detailed review of lifetime gifting options may be more appropriate prior to further gifting taking place either outright to individuals or to trusts. Therefore, if you would like to discuss lifetime gifting or inheritance tax planning in more detail, please contact our Wills, Trusts and Estates team who would be delighted to assist.