Recent research has shown that more people are gifting during lifetime rather than waiting until death to reduce their eventual IHT liability. However, lifetime gifting can have a number of consequences:
- Any gifts not covered by an exemption or allowance will be either a Potentially Exempt Transfer (PET) or Chargeable Lifetime Transfer (CLT).
- PETs and CLTs remain part of your estate for IHT purposes for seven years from the date of the gift so if you die within that time there will still be a potential IHT charge on the value of the gift.
- Taper relief is available to reduce the IHT if you die between three and seven years after the date of the gift. However it only reduces any tax liability arising as a result of the gift and as such, if all your gifts do is use your nil rate band, there will be no reduction in tax until seven years have passed.
- Gifts to spouses are exempt but gifts to other individuals are PETs.
- Gifts into most trusts are CLTs. These can trigger a lifetime IHT charge if the cumulative value transferred in any one seven year period is over the nil rate band for IHT which is currently £325,000.
- If you gift an asset rather than cash which is subject to Capital Gains Tax (CGT) and the value at the date of the gift exceeds the cost to you of the asset you may trigger a CGT charge and have to pay tax as a result.
- If the asset is a business asset or the transfer is into trust it may be possible to hold this gain over and avoid an immediate CGT liability.
- Every individual has an annual IHT allowance of £3,000 which they should use to transfer assets to the next generation if they have a potential IHT liability.
- If your usual income exceeds your usual expenditure you may qualify for gifts out of excess income relief but to qualify you will need to start a regular pattern of gifting and to claim the exemption good record keeping is essential.
- For any gift to be effective for IHT savings you must agree to waive all future right to the income or capital attaching to the asset.
Individuals not only gift to save IHT but also to protect assets from Long Term Care fees. As a recent article in the Daily Mail highlighted, local authorities are starting to look very closely at these types of arrangements where they believe that the reason for the gift is purely to remove assets from the estate to avoid paying.
Other options are available to those looking to save either IHT or protect from Long Term Care fees.
For IHT, options include life assurance paying into trust outside of the estate to cover any potential IHT liability or investments which enjoy either Business Property Relief or Agricultural Property Relief.
Most of all, it is important that the person gifting ensures that they retain sufficient capital to maintain their own desired standard of living for their lifetime.
Fortunately, or unfortunately depending on your perspective, none of us know when we are going to die or how much money we may require in the meantime but if you are 95 and still have £2m in the bank you may like to consider your options! Click here for more information.