Lifetime gifts in probate

What are lifetime gifts?

Lifetime gifts are cash or assets gifted by the person who died while they were still alive.

For example:

• Mr Smith gives his son £10,000 a year for 5 years before he dies
• Mrs Taylor sells her house to her daughter for £200,000 two years before she dies, when the market value is £250,000: this amounts to a gift of £50,000. (In this example the gift only applies because the purchaser was related to Mrs Taylor. It wouldn't be seen as a gift if they weren't related)

Premiums paid out on life insurance policies could also be treated as lifetime gifts in certain situations.

Lifetime gifts could be liable for Inheritance Tax, so it's vital to investigate these fully and report them to HMRC accurately, to avoid penalties.

Types of lifetime gifts

There are two types of lifetime gift:

• potentially exempt transfers
• gifts with reservation of benefit

Potentially exempt transfers

Most gifts to individuals will be Potentially Exempt Transfers (PET). With a PET, if the person who made the gift lives for 7 more years after making the gift, it will be exempt from Inheritance Tax, no matter what the value is. This is as long as that the person making the gift didn't continue to benefit from it in any way, otherwise it's a gift with reservation of benefit.

Gifts with reservation of benefit

This is when someone has gifted one of their assets to someone else, but has continued to benefit from it in some way. If it's a property it could be that they've then carried on living there rent free, for example.

The 7 year rule doesn't apply to a gift with reservation of benefit (also known as a GROB). The value of the GROB will need to be reported to HMRC, and this needs to relfect how much it was worth on the day the person died. This type of lifetime gift is very common with property and also with bank and building society accounts.

It's not always straightforward to work out whether or not a lifetime gift should be classed as a GROB. The law around pre-owned assets is complex area and you might need specialist advice.

If the the lifetime gift is a gift with a reservation of benefit, then it must be reported to HMRC on form IHT400.

What are the personal representative’s duties around lifetime gifts?

To determine whether lifetime gifts need to be added to the estate, the personal representative will need to:

• Establish whether the person who died owned any assets during their lifetime (either solely or jointly) but no longer owned them when they died

• Check whether they ever made any gifts with a reservation of benefit, and whether the reservation ended more than seven years before death

• Investigate whether any gifts were made in the 7 years before the person died and, if so, if any other gifts were made a further 7 years from the earliest gift; this could mean an investigation into 14 years.

Investigating lifetime gifts

A good starting point is to speak to relatives, friends and anyone else likely to have received lifetime gifts from the person who died. This could include gifts for birthdays, weddings, Christmas or other religious festivals. Also check whether the person paid for anything on someone else’s behalf, such as holidays or bills, or if they lent someone money which was never repaid.

Bank statements should be checked for any money paid to individuals (or Trusts). HMRC recommends checking the previous 3 years’ bank statements, which will give a good indication of the gifts made. If there are any withdrawals or transfers which seem unusual, then review bank statements for the full 7 years.

If the home address of the person who died is different to the address in the Will, check if the other property was sold or gifted. Similarly, if something listed in the Will can no longer be found, find out whether it was sold or gifted which the person was still alive.

Also check the purchase details of any jointly owned property. If an unequal contribution was made to buy a house, make sure the share of the property is declared correctly.

For example, if the person who died bought a house with their two children, all owning an equal share, then one third of the purchase cost should have been provided by them. If they actually paid all the legal costs and other expenses as well as their one third share of the purchase price, then two thirds of those costs could be deemed a lifetime gift to their children.

Lifetime gifts and estate value

The value of any gift with reservation of benefit is added to the estate value and this needs to be the value of the gift at the date of death.

Taper Relief

If the person making the gift died between 3 and 7 years of making a PET, taper relief can be applied when adding it to the estate value. This relief only applies if the amount of the PET exceeds the Inheritance Tax threshold, which is currently £325,000.

If the relief applies then it reduces the amount of Inheritance Tax payable on the PET, depending on the number of years the person survived after making the gift. For example, Mr Smith gave £350,000 to his son on 14/1/2008. Mr Smith died on 14/04/2011 so he survived the PET by 3 years but died before the 4 year anniversary of making the gift. Taper relief of 20% applies which means that the IHT payable on the gift will be:

£350,000

Less IHT threshold (£325,000)

£25,000

IHT at 40% £10,000

Less Taper Relief at 20% (£2,000)

IHT payable £8,000

Exemptions on lifetime gifts

There are some exemptions that reduce the amount of lifetime gifts to be added to the estate.

Annual exemption

A person can give up to £3,000 away each tax year during their lifetime, either as a single gift or as several gifts adding up to that amount. They can also use any unused allowance from the previous tax year as long as the current tax year’s allowance is used first.

Small gift exemption

Small gifts of up to £250 each can be made to as many individuals as a person wishes in any one tax year provided no other gifts were made to them.

Wedding and civil partnership gifts

Gifts to someone getting married or registering a Civil Partnership are exempt. A limit is placed on the amount which can be gifted as follows: up to £5,000 from a parent/step parent; up to £2,500 from a grandparent or remote ancestor; up to £1,000 from anyone else.

Regular gifts made out of excess income

These must be made regularly (or, if just once before death, made with the intention of being regular) and out of surplus income. They must also leave sufficient income for the person making the gift to maintain their usual standard of living.

Gifts which are always exempt

A person can make gifts to certain people and organisations without having to pay any IHT and these gifts are exempt whether made during life or on death:

• husband, wife or civil partner, as long as they have a permanent home in the UK
• a registered charity
• some national institutions such as museums, universities and the National Trust
• any UK political party that has at least two members elected to the House of Commons or has one elected member, but the party received at least 150,000 votes