Gifting and Inheritance Tax
Inheritance Tax (IHT) is a tax paid on your estate after you’ve died. It’s a concern for many people who want to ensure their loved ones receive maximum benefit from any inheritance. IHT rules are complicated but with careful planning, tax liabilities can be lessened.
Gifting is often an easy step that can be taken to mitigate IHT. The rules depend on the type of gift you make.
Gifts of Capital
Each person can gift £3,000 in each tax year without any IHT implications. This is £3,000 total and not £3,000 to each recipient.
You can also make smaller gifts of up to £250 to anyone who has not received any other gift from you.
Gifts over the £3,000 annual limit are known as potentially exempt transfers (PETs). If you survive for seven years from the date you made the gift then you probably won’t need to pay IHT on it. If you die within the seven year period, the value gets brought back into your estate which means it’s likely you will need to pay IHT on it.
(When we use the term ‘estate’ this means everything you own when you die – from property and shares to money in the bank).
Careful consideration needs to be given when making any gift. It may be necessary to update your will and there might be other consequences such as loss of income, loss of use and enjoyment (for example, giving away a car and not being able to use it), and any capital gains tax liability.
Gifts of Surplus Income
If you have surplus income, this can be gifted without any IHT consequences and there is no limit on the amount that can be gifted.
The gift must be made from ‘spare’ income, paid out as part of your ‘normal’ (typical or habitual) spending. You must also be able to maintain your usual standard of living. HMRC (HM Revenue & Customs) will request full details of all sources of income and your annual outgoings to evidence that any gifts made do qualify.
There must be an intention to make gifts from your surplus income and there must also be a regular pattern of payments for example on a monthly, quarterly, or annual basis.
The amount given does not need to be the same on each occasion as long as the gifting becomes part of your normal expenditure.
Gifting your Home
You may consider making a gift of your home to your children but this is rarely something that a lawyer would recommend.
If you make a gift but continue to benefit from the asset – for example, gifting your home but continuing to live in it – this will not work for IHT planning purposes. In these circumstances you are caught by the “gift with reservation of benefit” rules. This means that regardless of whether you live for 7 years, your taxable estate will still include your home.
The only way to avoid getting caught by these rules would be to pay a full market rent for your occupation of the property. However, the rent will then be income for your children and subject to income tax.
There are other risks to gifting your property:
• Your home would be owned by your children – they could potentially sell the property, raise a mortgage against it, move in or have a lodger.
• If your children were to get divorced or have financial difficulties, your home would be their asset and subject to claims from spouses and creditors.
• If your children do not live in the property then any increase in the value will be subject to capital gains tax.
• If your children don’t already own their own home but later wish to buy somewhere, they will have to pay higher rates of stamp duty.
• If you need care in the future and require local authority funding, they could argue that you have deprived yourself of assets and still include the value of your property in your estate in any financial assessment.
It’s important to keep detailed records of any gifts made. It may be necessary for your executors (the person or people legally responsible for carrying out the wishes of someone in their will) to report the gifts when dealing with the administration of your estate.
Capacity to Make Gifts
You also need to have capacity to make a gift – you need to understand the nature of the gift and the permanence of it, taking into account the size of the gift and your total assets.
If you have an LPA (Lasting Power of Attorney) in place, the people appointed to act for you as attorneys and deputies have very limited scope to make gifts on your behalf. It may be necessary for them to seek an authority from the Court of Protection to make gifts.\
Before undertaking any IHT planning, you should always seek advice from someone who is appropriately qualified – like an SFE solicitor. There is no “one size fits all” option and each person’s position should be considered on a case-by-case basis.