Lifetime gifting can be an effective way to pass wealth to the next generation while reducing potential Inheritance Tax (IHT) exposure. However, the tax implications of gifting assets during your lifetime are often more complex than expected. Without careful planning, gifts can trigger unexpected tax charges for both the gifter and the recipient.
Our Tax team outline the key tax considerations of lifetime gifting, helping you understand how IHT, Capital Gains Tax (CGT), trusts and family investment structures can all play a role in effective estate and wealth planning.
What is a lifetime gift and how is it impacted by Inheritance Tax?
Lifetime gifts can include assets transferred to individuals, trusts, or companies, as well as gifts made at undervalue. In addition, a gift is not limited to cash but any transfer of assets. Each of these scenarios is treated differently from a tax perspective, which makes it essential to understand the wider implications before proceeding.
Most gifts made to individuals are classed as Potentially Exempt Transfers (PETs). These do not trigger an immediate IHT charge and will fall outside the donor’s estate if they survive for seven years. If the gifter passes away within that period, the value of the gift may become taxable.
By contrast, gifts made into most trusts or certain companies are Chargeable Lifetime Transfers (CLTs). These can give rise to an upfront IHT charge at 20%, although this may be reduced or eliminated if the donor’s nil rate band is available.
Where tax does arise following death, taper relief may reduce the rate of IHT payable if the donor survived for more than three years after making the gift.
Making use of IHT exemptions and reliefs
There are several exemptions that can make lifetime gifting particularly tax efficient when used correctly. These include:
- The annual £3,000 exemption
- Small gifts of up to £250 per recipient
- Gifts made on marriage
- Regular gifts out of surplus income.
When properly structured and documented, these gifts can fall completely outside the scope of IHT.
Business owners and landowners should also consider Business Property Relief (BPR) and Agricultural Property Relief (APR). These reliefs may apply to lifetime gifts of qualifying assets and can reduce IHT by up to 100%, subject to strict conditions.
Avoiding gifts with reservation of benefit
One of the most common pitfalls in estate planning is a gift with reservation of benefit. This occurs where an individual gives away an asset but continues to benefit from it, a common example is when a parent gifts their home to children but continues to live in it following the gift.
In these cases, the asset may still be treated as part of the estate for IHT purposes, and additional income tax charges can arise. Although it may be possible to avoid this by paying full market rent, the arrangement must be commercially robust to be effective.
Capital Gains Tax and wider tax considerations
While cash gifts are exempt from CGT, most other assets are treated as being disposed of at market value. This means that CGT may be payable even where no money changes hands. Each individual has an annual CGT exemption, and gains above this are taxed at rates of up to 24%.
Certain reliefs, such as holdover relief on business or trust gifts, and main residence relief on qualifying property, can reduce or defer CGT, but these are subject to detailed conditions and restrictions.
Wider tax considerations should also not be overlooked. Stamp Duty Land Tax (SDLT) may apply where property is gifted with debt or transferred to a company, while income tax rules determine who is taxed on income arising from gifted assets. Special rules apply where parents gift income producing assets to minor children.
Trusts and Family Investment Companies
Trusts and Family Investment Companies (FICs) are often used as part of long-term family wealth and estate planning.
Trusts can offer control, flexibility and protection, but come with additional compliance and potential IHT charges over time. FICs, on the other hand, allow parents to retain control through voting shares while passing future growth to children, though they involve ongoing corporate and tax obligations.
Taking a strategic approach to lifetime gifting
With the right advice, gifting can form a valuable part of a wider Inheritance Tax and wealth planning strategy.
If you are considering lifetime gifting, you can catch up on our latest Advisory Hour webinar with Tax Director Natalie Pollard here as she explores why a strategic approach is vital to avoid unexpected tax issues.
Get in touch with our specialist team today to ensure your plans are structured tax efficiently and aligned with your long‑term objectives.
