88% Don’t Understand Inheritance Tax Rules on Lifetime Gifts

24 December 2018

Research has found that only 12% of people know how much they are allowed to gift each year tax-free. It has been suggested that this confusion could be putting people off making gifts. We explain how Inheritance Tax works on lifetime gifts during Probate.

Confusion around Lifetime Gifts and Inheritance Tax

When someone dies, their debts need to be settled and everything they owned (called their Estate) distributed to the people entitled to inherit it. This process is called Probate. Depending on the value of the Estate and who this is being inherited by, Inheritance Tax might need to be paid before the Estate can be distributed. If this is the case, gifts that were made by the deceased while they were still alive may also need to be included in the value of the Estate for Inheritance Tax purposes. For more information, see Lifetime Gifts in Probate and Inheritance Tax.

Research carried out by wealth management firm, Brewin Dolphin, has revealed that most people don't fully understand the Inheritance Tax rules around lifetime gifts, with a mere 12% correctly stating what the annual tax-fee gift allowance is. The average response was that just over £1,500 could be gifted each year tax-free, which is half of the actual figure of £3,000. It has been suggested that this uncertainty is deterring the older generation from sharing their wealth with their loved ones.

Of the respondents with children, almost half said that they would give their children more money if there were no tax implications, with a third of grandparents also saying the same. In reality though, many simply don't feel confident enough about the Inheritance Tax rules to make the most of the allowances available to them.

So What Are the Rules on Lifetime Gifts?

If you are acting as an Executor, administering the Estate of a loved one who has passed away, then it's important for you to understand the Inheritance Tax rules on lifetime gifts. As part of your Executor's duties, you will need to investigate whether or not any lifetime gifts were made by the deceased in the 7 years leading up to their death. You will then need to establish whether any Inheritance Tax is payable on these gifts. Generally gifts that were made more than 7 years before death don't need to be taken into consideration.

It's true that the rules surrounding Inheritance Tax on lifetime gifts are complicated, so we will break these down into simple terms.

A lifetime gift can be a monetary gift, or anything of monetary value. This might include a family heirloom, a valuable piece of art or even a property. Whether or not Inheritance Tax will be payable on these gifts will depend not only on whether the annual allowance has been exceeded, but also on what that gift was and who received it.

Some recipients of lifetime gifts will be exempt from Inheritance Tax liability. These are called exempt Beneficiaries and they are also exempt from Inheritance Tax liability on inheritance received after the death. Exempt Beneficiaries include the spouse or civil partner of the deceased as well as any registered charities, so gifts made to these recipients won't be liable for Inheritance Tax, regardless of their value.

Small gifts of up to £250 won't need to be included in Inheritance Tax calculations, unless there were multiple gifts of £250 to the same person in the same year.

Gifts that have been made out of surplus income also won't be liable for Inheritance Tax. Bear in mind that if you plan to use this exemption, you will need to prove that the gift was made from surplus income that the deceased had available.

Make sure that you make full use of the annual allowance of £3,000. If the total value of gifts made by the deceased didn't exceed £3,000 per year, then no Inheritance Tax will be payable.

Carrying Over Unused Allowance

It's also worth noting that any unused allowance from one tax year can be carried over to the next tax year. So, for example, if no gifts were made in 2014/2015 but then £4,000 was gifted in October 2015, the £3,000 allowance from the 2015/2016 tax year will be used up first and then £1,000 from the unused allowance from 2014/2015 can be carried over. So no Inheritance Tax will be payable on the £4,000 gift made in 2015.

Unused allowance can only be carried over for one year before it is lost.

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