Lifetime Gifting

Making gifts in your lifetime can result in inheritance tax becoming payable on your death or they can cause problems in relation to the Deprivation of Capital Rules, so it is important to be aware of what the rules are, and what you can and can’t do, to avoid falling foul of them.

Annual Allowance

Every individual domiciled in the UK has an Annual Allowance of £3,000 which means that they can give away up to £3,000 each tax year without any tax without any inheritance tax consequences.

Any unused Annual Allowance from the previous tax year can also be brought forward and used in the current tax year. Therefore, if you didn’t make any gifts in the last tax year, then you can pull the full allowance forward and give away £6,000 in the current tax year.

If you choose to make a gift larger than £3,000 then you will need to survive a period of 7 years in order that the value of that gift won’t be brought back into your estate for inheritance tax purposes on your death. If you die within the 7 years, the value of that gift (or at least some of it) will fall into your estate for tax purposes,

Small Gifts

You can make any number of small gifts up to £250 to different people.

Gifts in Contemplation of Marriage

Gifts can be made in consideration of marriage, as follows:

• £5,000 to your children
• £2,500 to your grandchildren or great grandchildren
• £1,000 to any other person

It is important that these gifts are made on or shortly before the marriage. Gifts made after the marriage are not covered.

Gifts out of Income

You can also make gifts out of income which will be exempt for inheritance tax purposes on death, provided they were made out of income and that in making them you have been left with sufficient income left to maintain a normal standard of living.

Record Keeping

It is important to keep a careful record of the gifts that you make in case they are later queried or the information is needed by your Executors.

Why make Lifetime Gifts?

Lifetime gifting can be a very good way to reduce an individual’s liability to inheritance tax by reducing the size of their estate so that it falls below the tax threshold. However, it is strongly advised that proper legal advice, specific to your individual circumstances is sought prior to any such gifting.

Deprivation of Capital Rules – Care Fees

It is also important to bear in mind that whilst gifting can have benefits when it comes to reducing an Inheritance Tax liability, there can be adverse consequences if the person making the gifts, then needs to go into care that they will need to pay for.

Issues arise when people gift significant assets such as their homes, in the belief that this will avoid them having to pay for care.

If a substantial asset is given away and the reason for the gift is to avoid paying for care, then the local authority will take the value of that asset into account when calculating your care home fees. This means that you will be charged for your care as though you still own that asset, when in reality it is no longer yours. This can result in debt which can be distressing for the person in care and their family.

For further information regarding the above or if you would like to discuss a Wills & Probate related query with one of the team, please call us on 0800 011 6666 or e-mail the team at legal@timms-law.com.