With the festive season in full swing and the challenge of finding the perfect gift on everyone’s mind, many of us might consider financial gifts to loved ones. Gifting can be a generous way to share your wealth while also mitigating potential Inheritance Tax (IHT) liabilities. However, understanding the rules and allowances around lifetime gifting is essential to avoid any surprises that could dampen your holiday cheer.
The Law as It Stands
Lifetime gifting refers to the transfer of assets or cash to another person during your lifetime. It’s a thoughtful way to support family members, contribute to significant life events, or simply share your wealth. From a tax perspective, lifetime gifting also plays a key role in reducing the value of your estate, which may be subject to IHT upon your death.
In the UK, IHT is currently charged at a rate of 40% on the value of an estate exceeding the tax-free threshold, commonly known as the nil-rate band (NRB), which is £325,000 per individual. An additional residence nil-rate band (RNRB) of up to £175,000 applies if the estate includes a main residence passed to direct descendants. Unused NRB and RNRB can be transferred between spouses, enabling some estates to pass up to £1 million tax-free on the second death.
However, gifts made within seven years before your death may reduce your NRB, potentially impacting your estate’s IHT position.
Exemptions for Lifetime Gifting
The following exemptions allow you to make gifts without them being subject to IHT:
Annual Exemption:
You can give away up to £3,000 per tax year, which won’t count towards IHT.
If unused, this allowance can be carried forward to the next tax year, allowing a maximum of £6,000 to be gifted tax-free.
Small Gifts Exemption:
You can give up to £250 per year to any number of individuals, provided no one receives more than £250 in the same year.
Wedding or Civil Partnership Gifts:
Gifts of up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to others are exempt from IHT.
Potentially Exempt Transfers (PETs):
Gifts exceeding the above allowances are considered PETs. If you survive seven years after making the gift, it will not be included in your estate for IHT purposes.
The Dreaded Gift with Reservation of Benefit (GROB)
Be cautious of creating a Gift with Reservation of Benefit (GROB), a common pitfall that negates the benefits of lifetime gifting. A GROB arises when you gift an asset but continue to derive benefit from it. For example:
Gifting your home but continuing to live in it rent-free.
Transferring a rental property but retaining income from it.
Under these circumstances, the value of the gifted asset remains part of your estate for IHT purposes, even if you survive seven years. The only exceptions are:
If you pay market rent to remain in the property.
If you no longer derive any benefit from the asset.
Keeping Records of Your Gifts
To ensure your gifts qualify for IHT exemptions and to simplify matters for your Executors, it’s essential to maintain clear records of:
The date of each gift.
The value of the gift.
The recipient of the gift.
Accurate records will help Executors provide evidence to HMRC and avoid disputes or delays during estate administration.
Planning Ahead with Professional Guidance
Lifetime gifting can be an effective strategy for reducing IHT liabilities, but it requires careful planning to avoid unintended consequences. Seeking professional advice ensures your gifts are structured correctly and comply with current laws.
How Toucan Law Can Help
At Toucan Law, we specialise in estate planning and IHT mitigation. Our expert team can help you:
Understand gifting rules and allowances.
Structure lifetime gifts to maximise tax efficiency.
Create a comprehensive estate plan tailored to your needs.
Whether you’re considering financial gifts this festive season or planning for the future, we’re here to guide you every step of the way.
Make This Festive Season Extra Special
Giving the gift of financial security is a heartfelt way to show your loved ones you care. With proper planning, you can share your wealth without worry, creating a lasting legacy that spreads holiday joy for years to come.
Contact Toucan Law today to discuss your gifting strategy and ensure a tax-efficient plan is in place.
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