Some families are bringing forward plans to pass money on and to make gifts during their lifetime, rather than leaving their wealth to be distributed on death.
Lifetime giving can save inheritance tax due on the donor’s estate, but it is important that any sizeable gifts. or long-term financial commitments made, are affordable for the donor. This should be considered, not just based on current circumstances, but on how those could change in the future.
For example, parents may have surplus funds now, but will the survivor of the couple also be financially secure long term? Guaranteed sources of income such as State pension or a final salary workplace pensions are likely to reduce or stop altogether on death. This could affect the amount which the couple can afford to give away now, without sacrificing their longer term financial security.
Give thought to possible future care needs, local authorities may consider any large gifts to be an act of asset deprivation on the part of the donor and deny access to funded care or other means tested benefits.
To assess the affordability of a larger gift or long- term commitment, we use cash flow planning tools to model the likely impact on the donor’s future lifestyle, so that lifetime giving may be approached with confidence.
The impact of the gift on the recipient also needs to be considered, especially if they are receiving means tested benefits, such as Universal Credit or Tax Credits, which could be lost if a gift means they become ineligible.
Lifetime giving can save inheritance tax, which is chargeable on the total cumulative transfers of value made by an individual during their lifetime and on death. If the total given away is more than £325,000 inheritance tax is payable at 40% on the balance unless an exemption applies (as per tax year 2021/2022).
Where a home is passed on to a direct descendent up to a further £175,000 can be given tax free, so long as the total taxable estate is not more than £2 million. This allowance is reduced by £1 for every £2 over £2million, so that once the estate exceeds £2,350,000 it is nil.
Married couples and civil partners who transfer assets between each other have an exemption from inheritance tax. Any portion of the nil rate band and residence nil rate band not used can be inherited by the survivor of the couple. This gives a total potential exemption of up to £1 million per couple. Neither of these concessions apply to couples who are not married or civil partners.
Other exemptions which apply are: -
|Annual exemption per tax year||£3,000, carried forward for up to one year|
|Small gifts per tax year, per recipient||£250|
|Gifts out of surplus income, must be regular and not reduce the donor’s standard of living||Unlimited|
|Gifts on marriage or civil partnership
|Business assets and agricultural property relief designed to preserve family businesses and farms.||Exempt after 2 years ownership, but complex rules apply, depending on the nature of the business and the assets passed on.|
|Shares in AIM listed companies and Enterprise Investment Schemes||Exempt after 2 years ownership.|
|Pension funds and pension lump sum death benefits||Unlimited exemption usually, provided transferred within 2 years of death.|
|Charitable bequests and donations to political parties||Unlimited exemption, if 10% or more of an estate IHT rate on balance reduced to 36%.|
Potentially Exempt or Chargeable Gifts
Gifts which do not fall within any of the exemptions are potentially exempt or chargeable lifetime gifts. A potentially exempt gift must be outright, have no strings attached to the gift and no possibility that the donor may benefit from the gift. If these conditions are met the gift will become exempt after 7 years. After 3 years, the value of the tax, for inheritance tax purposes, tapers by 20% per year.
Gifts where conditions are attached, for example, placed in trust for a class of discretionary beneficiaries, rather than given outright, are chargeable lifetime transfers. If these exceed the available nil rate band of the donor, a lifetime charge of 20% of the value of the gift is payable immediately.
Where the donor reserves any rights over the gift, the asset given will remain part of the chargeable estate and will not benefit from the 7-year rule or tapering.
Our advisers can design a strategy for lifetime giving and estate planning which is tax efficient and affordable. To find out more please contact your usual LEBC adviser, call 0800 055 6585 email email@example.com or use the live chat facility.
The information contained in this article is based on the opinion of the author and does not constitute financial advice or a recommendation to any Inheritance Tax strategy, you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate taxation and Trust advice or will writing.
All statements concerning Inheritance Tax are based on our understanding of current tax law and HMRC practice. Levels and bases of, and relief’s from taxation are subject to change.