Lifetime gifting and good record keeping

Lifetime gifting

The gifting rules do not just apply to cash. Anything of value which you give away is potentially relevant when calculating inheritance tax on your death. If you give away your car, your house, a piece of art or just about anything else with a monetary value, it is a gift for tax. In the case of anything except cash, Capital Gains Tax may also be relevant and you should take advice before making the gift if it is of high value (especially in the case of your house, where many other issues arise).

You can gift to a total value of £3,000 per tax year with no inheritance tax consequences. This is known as your annual exemption. This amounts to £6,000 per couple, per tax year. You can go back one tax year to use any unused allowance from the previous tax year, but only after you have used up the current year’s allowance.

You can make as many small gifts of up to £250 per individual, to as many different individuals as you wish in any tax year. You cannot make a gift of £3,250 to one individual and claim both your annual exemption and small gift allowance.

You can make gifts on the occasion of marriage or registration of a civil partnership. How much you can give tax-free depends on your degree of relationship to the parties. You can give £5,000 to your child, £2,500 to your grandchild and £1,000 to anyone else.

Apart from the above exemptions you can make larger gifts of cash or assets to your children or other beneficiaries during your lifetime. However, where the value of these gifts is above the annual exemption you have to survive seven years from the date you make the gift before they drop out of your estate for IHT purposes. These gifts are known as potentially exempt transfers or ‘PETs’.

For such gifts to drop out of the reckoning you cannot retain any benefit from the cash or assets gifted. If you continue to benefit in any way then the gift will be ineffective for IHT purposes and the seven-year period will not begin to run until you cease to have any right to, or use of, the asset gifted.

Even if you make a gift and retain no right to benefit from it, the value of the gift itself will not reduce for IHT purposes during the seven-year period. If you give away £50,000 in year one but die in year six, then the whole £50,000 remains in your estate for IHT purposes. There is a relief called taper relief, but this only applies to the rate of tax the gift bears if the gift itself becomes taxable. Consequently, the relief is only relevant if you have gifted amounts in excess of the £325,000 tax allowance (‘nil rate band’) in any seven-year period, and then it only applies to the sums above the allowance (not to the full amount).

If you are planning on making lifetime gifts, it is essential that you keep a detailed list of all gifts made – including those within your annual exemption. The survey by Charles Stanley interestingly found that 45% did not keep any written record of gifts. Your record should include details of what has been given away, the exact date of the gift and details of the recipient. It is only by doing this that your executors will be prepared to complete the necessary paperwork for HMRC.

How can Blake Morgan help?

Our specialist Succession & Tax team at Blake Morgan are here to help. We can guide you through your estate planning and provide bespoke advice about how best to minimise your exposure to inheritance tax.