Making lifetime gifts could have an adverse impact on your Inheritance Tax position or could cause you problems in relation to the Deprivation of Capital Rules, so its important to be aware of what the rules are and how to avoid falling foul of them.
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 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 as long as you survive for a period of 7 years that amount will be disregarded and will not be brought back into your estate for tax purposes on your death. If you die within the 7 years, then that gift will form part of your estate value at death.
You can also make any number of small gifts up to £250 to different people.
Gifts in Contemplation of Marriage
Larger gifts can be made in consideration of marriage, as follows:
- £5,000 in consideration of marriage of any of your children
- £2,500 in consideration of marriage of any of your grandchildren or great grandchildren
- £1,000 in consideration of marriage to any other person
Gifts out of Income
Gifts made as out of income are exempt for tax purposes on death provided it can be shown they were out of income with sufficient income left to maintain a normal standard of living. If income payments are made in excess of £3,000 per year very great care must be taken with record keeping so that it can be proved to the Inland Revenue that the payments made were from surplus income.
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.
Many people wrongly assume that they can avoid care home fees by giving away large assets such as their home or large sums of money.
If large sums of money or a home is given away for the purpose of avoiding care home fees, then this can be viewed as a ‘Deprivation of Capital’. A Local Authority, when calculating care home fees, can disregard the fact that the asset has been given away and still calculate the fees as though the asset is still owned. This can be very distressing for the family and can often result in debts due to the care home or local authority which become payable on the death of the person who has gone into care.
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 email@example.com.