Lifetime gifts to children – don’t get caught out
Making lifetime gifts to children can be sensible inheritance tax planning, however, there are plenty of non-tax related issues to think about too. One such issue is the presumption against double portions, which can result in lifetime gifts to children being brought back into account on death. If you plan to make any gifts during your lifetime and would like to ensure your estate is left as you had planned, here's what you need to know about the presumption against double portions.
How could my estate be affected?
The presumption against double portions can apply where a parent makes a Will in which they leave a legacy to a child and, after making this Will, the parent makes a large gift to the child (or, in other words, the parent makes a gift of a "portion" of that child's inheritance). In these circumstances, it is presumed that the gift to the child of the "portion" of their inheritance was meant to satisfy, in whole or in part, the legacy under the Will.
For example, Mr Jones makes a Will, under the terms of which he leaves his estate to his three daughters in equal shares. Let's say his estate is worth £600,000, and no inheritance tax is due. After signing his Will, Mr Jones makes a gift of £200,000 to his daughter Jane. Mr Jones dies a year later.
If the presumption against double portions did not apply, Mr Jones' daughters would each receive a third of £400,000 on Mr Jones' death (i.e. the value of his estate, less the gift to Jane). Therefore, each daughter would receive £133,333. The total passing to Jane, including the lifetime gift, would be £333,333.
However, if the presumption against double portions were to apply, the gift to Jane would be taken into account when Mr Jones' estate is divided on death. As a result, each daughter would receive £200,000.
When does the presumption apply?
The presumption only applies where the gift made to the child after the date of the Will qualifies as a "portion" of that child's inheritance. A "portion" for this purpose is loosely defined as "a gift intended to set up a child in life or to make substantial provision for him or her". Case law has established that a gift of £20,000 or more is sufficient to qualify as a portion.
In addition, the presumption will not apply where there is evidence that the parent intended that their child should receive both the lifetime gift and the legacy under the Will in full. Such evidence could be:
- in the Will itself – for example, a statement that any lifetime gifts will not affect the legacies given under the Will; or
- outside of the Will – for example, evidence of conversations or letters showing that the lifetime gifts were intended to be in addition to the legacies given under the Will.
What do you need to do?
If you intend to make large gifts to your children now or in the future, you should consider how the presumption against double portions might affect the gifts in your Will.
Your Will may already contain provisions that adequately deal with the position, such as those explained above. If it doesn't, it is certainly worthwhile recording in writing what your intentions are when making large gifts to your children, and how you intend such gifts to affect your Will. Alternatively, you could consider either updating your Will, or making a codicil. This could provide, for example, that gifts to your children over a certain amount and within a certain period should be taken into account when calculating their entitlement under your Will.
If you require advice or an initial discussion about how the presumption against double portions might affect you, please contact a member of our Succession and Tax team.