Making lifetime gifts can be a tax-efficient way to pass on wealth and assets during your lifetime.
Gifting cash or assets in your lifetime potentially removes the value of the gift from your estate, consequently reducing the amount of Inheritance Tax (IHT) due after death.
Lifetime gifting is therefore a valuable part of IHT planning, and gifts can be made through exempt transfers, potentially exempt transfers or chargeable lifetime transfers. In all cases, there are certain criteria must be met in order to reduce your exposure to IHT.
Here we explain the rules and IHT implications related to the different methods of lifetime gifting.
Exempt transfers
Exempt transfers are gifts you can legitimately make at any time, without incurring any IHT. These include:
- Gifts of any value between spouses or registered civil partners
- Annual gifts of up to £3,000 in each tax year
- Regular payments out of your income with no set limit, provided you have enough income left to fund your normal lifestyle
- Wedding gifts or civil partnership ceremony gifts (you can give £5,000 to your children, £2,500 to grandchildren or £1,000 to anyone else)
- Small gifts of up to £250 per person, per year
- Gifts to charities, political parties or national organisations
Potentially exempt transfers (PETs)
A PET is an outright gift from one individual to another, which exceeds the available exempt transfers detailed above.
This method of gifting allows individuals to gift assets of unlimited value to family and friends during their lifetime without incurring IHT if they live for a further seven years from the date of the gift.
If the donor dies within seven years of making the gift, the asset will still be subject to IHT. If the donor dies within three years of making the gift, the asset will be chargeable at the full 40% rate. Gifts that are made three to seven years before death are subject to taper relief, where they are taxed on a sliding scale:
| Date of gift | % of IHT due |
| Gifts made less than 3 years ago | 100% of IHT is due – 40% |
| Gifts made 3-4 years ago | 80% of IHT is due – 32% |
| Gifts made 4-5 years ago | 60% of IHT is due – 24% |
| Gifts made 5-6 years ago | 40% of IHT is due – 16% |
| Gifts made 6-7 years ago | 20% of IHT is due – 8% |
| Gifts made 7+ years ago | No IHT is due |
A PET is frozen at market value at the date of the gift, meaning if the asset grows in value, this won’t be subject to IHT. If the asset generates income, this could be paid to a recipient who may pay income tax at lower rates of tax.
Other areas to consider in relation to PETs include:
- Gifts can trigger other charges such as Capital Gains Tax or Stamp Duty Land Tax
- Anti-avoidance legislation could be imposed by HMRC is the donor, their spouse or minor children are intending on retaining any kind of benefit in the asset
- When making an outright gift you are giving away the asset completely, and lose all control over it
Chargeable lifetime transfers (CLTs)
A CLT includes a gift of an asset to a trust.
A CLT is only subject to tax on the initial transfer if the value exceeds the nil rate band which is currently £325,000. The nil rate ban refreshes every seven years, meaning it is potentially possible to create a new trust without any immediate IHT charges every seven years.
If a donor lives for a further seven years after the date of the gift, CLTs will usually fall outside their estate for IHT purposes. If the donor dies within seven years of making the gift, the gift will still be subject to IHT.
A trust allows you to maintain control over the assets you have placed in it, and offers a greater level of protection compared to an outright gift, as they can be set up without giving a beneficiary full access to the income or capital, meaning a CLT may be more suitable than a PET in certain circumstances.
However, there are a number of compliance and filing obligations related to the establishment and ongoing structure of a trust, which will bring about associated costs. There are also potential ongoing IHT charges, however, these are capped at 6%.
Similarly, to a PET, if the donor, their spouse or minor children intend to retain any kind of benefit in the trust assets when making a CLT, HMRC could impose anti-avoidance legislation.
How we can help
Lifetime gifts can be an efficient tool to reduce your IHT, but it is a complex area, with many different factors to consider, such as when you want your beneficiaries to gain access to the assets you gift, how much control you want to retain over your assets and other tax charges.
If you are considering lifetime gifting, please get in touch with our specialist tax advisers who can look at the most suitable options to suit your individual circumstances, and provide advice on any tax charges that may be triggered.
Watch our video below where Private Client Tax Manager Harriet Pye-Watson explains more about lifetime gifting. This video is part of our wider Inheritance Tax planning video series, which can be viewed on our YouTube channel.
