Lifetime Gifts - What You Need to Know About Inheritance Tax, Allowances and Exemptions

Inheritance Tax on Gifts

Lifetime gifts can include gifts of money, personal goods, properties and shares. If you give away more than £3,000 in one tax year (see below), the gift becomes what is called a Potentially Exempt Transfer (PET). The value of the PET is included in your estate for inheritance tax purposes for the seven years following the date of the gift. Once you have survived for seven years from the date of the gift, the value of the gift falls out of your estate and is therefore not subject to inheritance tax.

If you make significant PETs during your lifetime, exceeding the amount of your nil rate band allowance for inheritance tax (currently £325,000), you must consider the following points:

• Any inheritance tax due as a result of your death on the PET is normally payable by the recipient of the gift unless your Will specifies.
• Gifts made within three years before your death are taxed at 40%. The tax due reduces by a certain percentage each year once you have survived the gift by three years. This is known as 'taper relief' but it only applies to the tax due on the gift and not the value of the gift itself.

Allowances and Exemptions on Gifts

In each tax year, you can make gifts up to a certain value that will be free of inheritance tax. The following allowances are available.

Annual Allowance

Each person is entitled to an annual gift allowance of £3,000 (or a maximum of £6,000 if the previous year's allowance is unused) without there being any implications for inheritance tax. This is a total gift allowance, and it is not an amount per recipient. Up to £3,000 can be given to one person, or the amount can be split between several people.

Small Gift Allowance

 You can give as many gifts of up to £250 in value to as many people as you wish in each tax year, provided you have not used another allowance on the same person. Birthday or Christmas gifts that are paid out of your regular income are exempt from inheritance tax.

Gifts for Weddings or Civil Partnerships

 Lifetime gifts on the occasion of marriage or registration of a civil partnership are exempt from inheritance tax. The allowance that is available will depend on the relationship between the donor and the recipient of the gift:

• up to £5,000 to a child of the donor
• up to £2,500 to a grandchild or great-grandchild of the donor
• up to £1,000 to any other person

If you are making gifts to the same person, you can combine the wedding gift allowance with any other allowance (except for the small gift allowance).

Gifts Between Spouses/Civil Partners

There is no inheritance tax payable on gifts between spouses or civil partners. You can make as many gifts as you like to your spouse or civil partner during your lifetime, provided they live in the UK on a permanent basis, and the marriage or civil partnership is lawful.

Gifts made to charities or political parties are also exempt from inheritance tax.

An Example of Gifts Made

An example of the rules outlined above can be demonstrated by gifts made by Dr Otto, who died on 18 September 2020.

 Dr Otto made the following gifts before he died:

• a £40,000 gift to his brother, eight years before his death
• a £325,000 gift to his children, three years before his death
• a gift of £80,000 to his friend, Joan, three years and seven months before his death
• a gift of £50,000 to a local charity

The gift of £40,000 to Dr Otto's brother, will be exempt from inheritance tax as it was made more than seven years before his death.

The gift of £325,000 to Dr Otto's children will come back in to Dr Otto's estate for inheritance tax purposes because Dr Otto died within seven years of making the gift. However, the gift will be subject to inheritance tax at 0% as the value of the gift falls within Dr Otto's available nil rate band allowance for inheritance tax.

Unless Dr Otto's will says otherwise, Joan will need to pay inheritance tax on the gift to her of £80,000. The rate of inheritance tax that will be applicable to the gift will be 32%. This is because Dr Otto's tax-free allowance has been used up by the gift to his children, and the gift to Joan was made within seven years of his death. Taper relief applies to reduce the rate of inheritance tax applicable to the gift from 40% to 32%. The Inheritance tax due on the gift to Joan will be £24,000.

The gift of £50,000 to the local charity will be exempt of inheritance tax, even though Dr Otto's nil rate band allowance has been used up and Dr Otto died within seven years of making the gift.

For further information about lifetime gifts, please contact William Hollins in our Private Client team on 020 7665 0905. For information about healthcare matters, please contact Rachel Crean in our Healthcare team on 020 7665 0950. Alternatively, please complete the form below.