An unwelcome gift – Inheritance Tax liabilities from gifting

A 2017 poll found that nearly two out of five people were not aware that their estate could have been liable for Inheritance Tax (IHT) on gifts made to their to loved ones during their lifetime

So, what are lifetime gifts and the implications when making such gifts to loved ones?

What classes as a gift?

  • Anything with ‘value’
    • Money
    • Possessions i.e. jewellery
    • Property
  • Something that loses its value when it has been transferred
    • For example, a house that you sell to your child, which is sold for less than the property’s worth
    • The difference in this value counts towards a gift

Are any gifts exempt from Inheritance Tax?

There are certain gifts that are exempt from IHT:

Normal gifts out of your surplus income (detailed accounts need to be kept)

  • Gifts that are given between spouses or civil partners
    • There is no restriction to the amount you can give to your spouse/civil partner during your lifetime
    • Your spouse/civil partner must be a permanent UK resident
    • This is not available to spouse/civil partner during whose relationship isn’t recognised legally
  • ‘Annual exemption’
    • £3,000 worth of gifts can be given every tax year, with no IHT liability
    • Unused annual exemption can be carried forward to the following year, but for one year only
    • Wedding and civil ceremony gifts (per person)
      • £5,000 for a child
      • £2,500 for a grandchild or great-grandchild
      • £1,000 for others

The maximum amount you can gift to someone who hasn’t benefited from annual exemption

  • £250 in a tax-year
  • Payments to help with someone else’s living costs
    • Children under 18 for maintenance or education
    • Elderly relatives
    • Infirm relatives

You can use more than one ‘exempt gift’ for the same person in a tax-year.  For example, you can gift your daughter your surplus income and wedding gift in the same tax year, and there will be no IHT liability – provided it within the allowances

The Nil Rate Band allowance refers to the IHT threshold that every person has on death – which is currently £325,000. The unused NRB is transferrable to the surviving spouse/civil partner’s estate on their death so that a family can benefit up to £650,000.

Potentially Exempt Transfers (PETs)

If you gift more than the applicable annual exemption then this gift is a potentially exempt transfer (PET) and provided you survive the gift by seven years it will not form part of your estate for inheritance tax purposes.  This is commonly referred to as the seven-year rule.

What exactly is the seven-year rule?

In the event of a death, any gifts that were given in the seven years prior will be taken into account when calculating your estate’s liability to inheritance tax. If there is a IHT liability on the estate, it is charged at a percentage – depending on the timescale:

  • Less than three years – 40 per cent

Any gifts that have been given during the three to seven years, before death, are taxed on a scale known as ‘taper relief’:

  • Three to four years – 32 per cent
  • Four to five years – 24 per cent
  • Five to six years – 16 per cent
  • Six to seven years – eight per cent

After seven years, the gifts are no longer counted towards the value of your estate.  however, there is a 14 year clawback rule to be aware of and so whenever making lifetime gifts you should take professional advice.

  • More than seven years – zero per cent

One matter to be aware of is the reservation of benefit rules.  This occurs where a person has made a gift during their lifetime but has retained some benefit in the gift.  This commonly occurs when people gift a house and continue to live in it or gift a painting but it remains handing in their home.  This will cause the gift to fail for inheritance tax purposes.

Inheritance Tax is extremely complex and small changes to your estate could have a significant impact on the amount of tax you are required to pay, which is why it is important to seek professional help. For help and advice, please get in touch

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Natalie Payne
Natalie is a Private Client Solicitor at Mackrell.Solicitors and is based in their London office. Natalie has a very hands on approach with her clients and guides them through every step when looking after their personal affairs and/or those of their friends and family.