Are Lifetime Gifts Subject to Inheritance Tax?

22 October 2018

By Probate Solicitor, Kim Hammond

Some lifetime gifts will need to be included in the value of the Estate for Inheritance Tax purposes. However, there are some allowances, exemptions and reliefs which can be applied.

Many people make gifts throughout their lives – to charities, family and friends – in varying amounts and for various reasons. Of course, there is nothing wrong with this. People may make as many gifts as they like and in such sums as they choose, but it may be the case that these gifts are counted as part of their Estate for Inheritance Tax purposes when they die.

Gifts and Inheritance Tax

The rules surrounding gifts and whether they are subject to Inheritance Tax are complicated. There are a number of exemptions and allowances which can be applied to gifts and not all gifts will be included in the value an Estate.

1. Annual Tax Allowance

A lot of people are familiar with the annual allowance for gifts, whereby up to £3,000 can be given each year without incurring any liability to Inheritance Tax. Any number of gifts can be made and they will not be counted as part of your taxable Estate when you die provided that when they are added together, they do not exceed £3,000.

If the annual allowance for the previous financial year was not used, this can be brought forward to increase the annual allowance to £6,000, though it cannot be taken forward again if it is not used. For example, if the annual allowance for 2016/17 was not used in either that year or 2017/18, it cannot be used to apply against gifts in the 2018/19 financial year.

2. Small Gifts

Small gifts can also be exempt from Inheritance Tax and would not therefore count as part of an Estate. A small gift has a value of less than £250 and a person can give as many of these as they like without incurring a liability to Inheritance Tax.

The exemption cannot be used against a larger gift and cannot be applied against multiple gifts to the same person in the same year.

3. Exempt Beneficiaries

Gifts to certain recipients are also exempt from Inheritance Tax. A person may make gifts to charities or to their spouse, for example, without them being included in the value of their Estate for Inheritance Tax purposes. These are called exempt Beneficiaries.

4. Surplus Income

It is also possible to make gifts out of surplus income and these too are considered to fall outside of the Estate for Inheritance Tax purposes. In order not to be liable for Inheritance Tax, however, it is necessary to show that a deceased person truly did have the surplus income available to make the gifts. In order to prove this, HM Revenue & Customs require a breakdown of the deceased's income and expenditure for the years that the gift(s) were made and the exemption has been applied.

5. Gifts Made 7 Years Before Death

Typically it is only gifts made within 7 years of the date of death that are included in the Estate for Inheritance Tax purposes and it is not always the case that these will be subject to Inheritance Tax.

Gifts made during the last 7 years of a person's lifetime ,which are not subject to any exemptions or reliefs, are counted as part of their taxable Estate, together with the assets they had or were entitled to when they passed away.

6. Nil Rate Band

The total sum of the Estate (including gifts where applicable) is subject to Inheritance Tax. It is not necessarily the case, however, that any tax will be payable as Estates are entitled to a tax-free allowance called the nil rate band. The nil rate band is currently £325,000, meaning that the first £325,000 of the Estate is taxed at 0%.

The nil rate band is
first applied against gifts, so unless gifts of a significant value have been made in the 7 years leading to the date of death, it is unlikely that any Inheritance Tax will actually be payable on them.

It is not uncommon for people to use lifetime gifts as a form of tax planning to reduce the value of their Estate before they die. We would always recommend seeking professional advice before embarking on such a scheme.

In conclusion, it is not always the case that gifts made during a person's lifetime will be subject to inheritance tax, in so far as there are allowances, exemptions and reliefs available to apply against them. Where gifts are not subject to any allowances or exemptions they may well be included with the other assets in the Estate for Inheritance Tax purposes but they may still be covered by the nil rate band and tax will therefore be charged at 0%. Some large gifts that fall over the nil rate band will be liable for Inheritance Tax.

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