Estate Planning and Lifetime Gifting

Lifetime gifting is where money or assets are given away during a person’s lifetime. Lifetime gifts can be made for a variety of reasons. As they reduce the value of the donor’s estate they can be inheritance tax (IHT) efficient. 

In this article, we look at how to use gifting as part of an estate planning strategy to mitigate IHT.

Lifetime gifting as part of an estate planning strategy

Lifetime gifting should be carried out as part of your estate planning strategy if your estate is likely to be liable to pay IHT. It is a good opportunity to consider lifetime gifts when making a Will, reviewing your Will or when significant life events occur, such as remarriage, the birth of a grandchild, or retirement and the sale of the family home or business.

Lifetime gifting, inheritance tax and the seven-year rule

If you make a lifetime gift (that is not automatically IHT exempt to a charity or to your spouse or civil partner) it may be classed as a ‘potentially exempt transfer’ and reduce your estate when calculating IHT liability.

If a donor survives for seven years after giving cash or an asset away then the gift is IHT free, provided that the donor does not continue to make use of the gift. If a donor continues to use the gift, this is referred to as a ‘gift with reservation of benefit’.  An example of a gift with a reservation is where a parent transfers the family home to their child, and the parent continues to live in the property until their death.

If a donor does not survive for at least seven years, the gift will not be exempt from IHT. The beneficiary of the gift could be liable for tax at 40% on the value of the gift, but tapering relief is available. It is a case of ‘survive and save’ as taper relief applies only if the total value of any gifts made within seven years prior to death exceeds the inheritance nil-rate allowance (currently £325,000). Tax is payable on the following scales if death occurs within:

1.  3 years of the gift - 100% tax
2.  3-4 years - 80% tax
3. 4-5 years - 60% tax
4.  5-6 years - 40% tax
5.   6-7 years - 20% tax
6. 7or more years – no tax

Lifetime gifts and IHT allowances and exemptions

Will solicitors can advise on the use of IHT allowances and exemptions to mitigate IHT liability, such as:

1.  Annual exemption of £3,000 that can be given away each tax year
2. Regular gifts made out of the donor’s excess income
3. Small gift exemption of gifts of up to £250
4. Wedding and civil partnership gifts with the gift limit depending on the relationship between donor and recipient.

Reviewing your Will when making lifetime gifts

Inheritance tax is complicated because of the complex IHT rules. When reviewing a Will your private client solicitor can make sure the Will is not only tax efficient but also reflects your wishes in light of your lifetime gifts.

Wills and Estate Planning Lawyers, Bournemouth

The team at Solomons Solicitors understand that IHT planning can feel daunting. You may feel unsure  where to start with your IHT strategy. Our expert team will talk you through your estate planning options and make the complicated simple so you can preserve as much of your estate as possible for your family and beneficiaries through efficient estate planning.

For a free initial consultation, call us today on 01202 802 807 or use our online contact form.