Lifetime transfers

Gifting in financial terms is referred to as lifetime transfers. As the name suggests, these are gifts that are given in one’s lifetime, but depending on the type and timing of the gift, they could still form part of your estate for inheritance tax calculations, so it’s important to understand the differences between different types of gifts and their tax treatment.

Exempt transfers

Some gifts are completely free of any Inheritance Tax implications. These include:

• Inter-spousal transfers – These are gifts between spouses or those in civil partnership. You can swap ownership of assets and gift anything at any time.
• Annual gift exemption – We can all gift away £3,000 every year to other individuals, Bare Trusts or Disabled Trusts. If you do not use the allowance one year you can roll forward a year’s unused allowance. It does not have to be given in one lump or to one person and can even be used to pay for life cover. It cannot be used in conjunction with other allowances to make larger gifts.
• Small gifts – We can gift away £250 to as many people you would like (as long as they have not had part of your annual allowance).
• Gifts in consideration of marriage – When a child gets married, you can gift £5,000 ahead of the marriage, £2,500 to a grandchild £2,500 or £1,000 to another relative or friend.
• Gifts for education and maintenance – You are also able to pay for a child’s maintenance, education or training up to the age of 18 or the end of full-time education.
• You can also give away any amount to a charity or political party.

Always keep a record, preferably with your Will, of any gifts you make.

Gifts out of regular income

If you are lucky enough to have ‘too much’ income and have a surplus every month after meeting your expenditure, you are able to gift away the surplus without any tax implications, such as paying grandchildren’s’ school fees, life insurance premiums for your spouse or civil partner, regular saving into your child’s account.

There are certain rules that need to be met for the exemption to apply, and it is advisable to take professional advice before taking this route. In any instance, when making a gift it is vital to keep accurate records.

Potentially Exempt Transfers (PETS)

You can gift away any sum in your lifetime, but if you do not live for 7 years after you made the gift and it is not an exempt gift (see above), it will fall back into your estate for inheritance tax calculations.

The amount of tax due, if any, will depend on the value of the gift and how long you survived after the gift.

Any tax due will be payable by the recipient and not by your estate, so it’s important to understand how PETs work.

The seven-year clock

You may have heard people refer to the seven-year clock, this is the time you must outlive a gift by for it to become completely tax free. Everyone has a Nil Rate Band which is the tax-free amount you can pass on after your death. Gifts that “fail”, i.e. made within the 7 year clock, use up this Nil Rate Band.

Gifts given in your lifetime are cumulative and if all the gifts made within the 7 years prior to death exceed the Nil Rate band, the excess over the band may become subject to inheritance tax. This is paid by the recipient of the gift.

The tax due may be reduced with taper relief.

What is taper relief?

If you die within the first 3 years of giving the gift, the excess over the nil rate band will be subject to tax at 40%. After the fourth year the tax is reduced on a sliding scale as follows:

Insuring the tax liability

It’s important to weigh up the probability of you surviving the seven years after making a large gift. Depending on your age, insurance policies can be taken out to provide cover on a scale that reduces at the same level as the taper relief, these are called ‘gift inter vivos’.

Chargeable Lifetime Transfers (CLTs)

Gifts to certain types of Trusts are known as Chargeable Lifetime Transfers.

If the CLT is greater that your available Nil Rate Band they are subject to an immediate tax charge of 20% (half of the death charge).

If the gift giver survives for seven years, then there is no more tax to pay. If the gift giver dies within the seven-year period, inheritance tax will be due at the higher death rate, but the tax already paid will be credited against the liability.

You can make gifts up to the Nil Rate Band every seven years to avoid the immediate tax charge.

Trusts are complicated arrangements with higher tax rates and administration rules. You should take professional advice if you chose to set up any type of trust.

Whole of Life Cover

Depending on your age, whole of life insurance can be an effective way of covering a potential inheritance tax liability and give you peace of mind that your assets can be passed on to your loved ones and not get eaten away in taxes.

Writing life policies into trust means that the proceeds are not paid back into your estate (and compound the problem), and are paid out immediately, providing funds to your beneficiaries ahead of probate.