A time for giving, a time for getting — a guide to lifetime gifts
When making lifetime gifts, there are a number of allowances and exemptions to consider.
As we enter the festive season, the theme of ‘giving’ is often at the forefront of our minds. Lorraine Wilson examines some of the allowances available for lifetime gifts under the inheritance tax regime.
Inheritance tax (‘IHT’) is a charge on the value of an individual’s estate on their death. Giving away assets during your lifetime can be a useful planning tool to reduce the value of the estate. ‘Gifts’ covers a wide range of transfers, including gifts of cash or other assets to an individual or a trust, charitable donations and even paying for school fees. The general rule is that when an individual (known as the ‘donor’) makes a gift, the donor must survive for a period of seven years for the gift to fall out of their estate for IHT purposes. If the donor dies within seven years of making the gift, its value will become chargeable to IHT. The rules are more complex for gifts into a trust.
Not all gifts are effective for IHT planning purposes. For example, you cannot give away your home but continue to live there. This would be caught by anti-avoidance rules so that the value of the house would remain in your estate for tax purposes, as though it had never been given away.
There are a number of allowances and exemptions which enable an individual to make tax-free gifts without having to survive for seven years.
An individual can give away up to £3,000 each tax year under the ‘annual exemption’. Gifts of the annual exemption can be to one person (or to a trust) or split between a number of people, but it is applied in strict time order against the first gift in the tax year.
Any unused annual exemption can be carried forward to the next tax year (but only for one year).
Gifts of up to £250 per recipient can be made each tax year. There is no limit on the number of individual recipients who can benefit from small gifts of up to £250; an individual could give £250 to every member of their family each year and the whole amount could be covered by the small gifts’ exemption. This may be useful for occasional small gifts, for example on birthdays or at Christmas.
However, this exemption cannot be used in conjunction with another allowance. For example, you could not give £3,250 to one person using both the £3,000 annual exemption and the £250 small gifts allowance.
A gift to an individual on the occasion of their marriage or civil partnership may be exempt. The amount of the exemption depends on the relationship between the donor making the gift and the recipient.
Each tax year, you can give up to:
- £5,000 to a child;
- £2,500 to a grandchild or great-grandchild; and
- £1,000 to any other person (no family relation necessary).
Unlike the small gifts’ exemption, the wedding gift allowance can be combined with another allowance such as the annual exemption.
The gift must be ‘in consideration of’ the recipient’s marriage. The timing of the gift is crucial; it may be on or before the day of the marriage but not after. Extra caution is required if the gift is to be made by cheque if the cheque is unlikely to be cashed until after the wedding. Consideration should be given to other methods of payment such as an electronic transfer instead.
Spouse/civil partner exemption
UK domiciled spouses and civil partners can gift an unlimited amount to each other. Their relationship must be recognised legally meaning that the exemption does not apply to ‘common law’ spouses or to those who have only a religious marriage which is not recognised by the law of England and Wales.
Normal expenditure out of income
Regular gifts may be exempt if it can be demonstrated that they are:
- Made out of income
- The donor has sufficient income after making the gift to maintain their usual standard of living
- The gifts are regular or part of the donor’s normal expenditure
Although the criteria are limited, this can be a valuable exemption for those with surplus income intending to make regular gifts. There can be variations in the amount, the recipients and the timing of the gifts, but the crucial element is that the donor must be able to demonstrate a settled pattern of gifting. This could be shown over a period of time or a commitment (formally documented) to making future gifts of a similar nature.
Birthday and Christmas gifts, regardless of the amount, may qualify as normal expenditure out of income if a regular pattern of gifting can be shown.
Lifetime payments to support a dependent relative are disregarded as ‘gifts’ for IHT purposes. Such payments can be made from income or capital, which means this exemption can have broader application than the normal expenditure out of income exemption which is restricted to income only. However, there are limitations as to who qualifies as a ‘dependent relative’ beyond a spouse/civil partner or minor child and the financial provision must be reasonable in the circumstances.
Gifts to registered charities in the UK and EU are exempt from IHT (both during lifetime and on death). Gifts to other charities located abroad may not qualify for exemption.
Gifts to political parties are exempt from IHT provided the party meets the relevant criteria; it must have at least two MPs elected to the House of Commons at the last general election or have only one MP elected and have polled at least 150,000 votes. The restrictive criteria effectively means that only gifts to the dominant UK political parties will qualify for exemption.
Other allowances may be available depending on the nature of the asset given away, such as certain business or agricultural assets which meet specific criteria to qualify for IHT reliefs. However, reliefs can be defeated by ‘clawback’ rules if the assets are disposed of by the recipient before the death of the donor.
Gifting under a Power of Attorney
An attorney acting under an Enduring or Lasting Power of Attorney has very limited scope to make lifetime gifts on behalf of the donor.
Attorneys are, however, permitted to make reasonable gifts to family members or charities on customary occasions such as birthdays, weddings, anniversaries, graduations, Christmas and other religious holidays. What is ‘reasonable’ depends on the donor’s financial circumstances and any such gifts must not impact the donor’s ability to pay for their care.
Any other gifts are likely to require the approval of the Court of Protection.
Top tips for making lifetime gifts
If considering making lifetime gifts to make use of exemptions and reliefs:
- Keep detailed records as your executors will need to provide details to HMRC in the event of your death
- Seek specialist advice about the availability of specific reliefs for business or agricultural assets
- Attorneys should consider the extent of their authority and if in doubt apply to the Court of Protection for approval
For expert guidance on estate planning, speak to our specialist inheritance tax solicitors.