Using a Lifetime Gifting exemption is one way to help reduce inheritance tax, but it is not always as straight forward as it may seem.

I am often asked ‘Who pays inheritance tax on gifts?’ or What is the inheritance tax 7 year rule?’

This short video explains further.

A video transcript is provided further below, if you would prefer to read about it.

Lifetime Gifting Exemption – Video Transcript

Gifting your money or assets to others for example, your children, can be an attractive option to help reduce inheritance tax.

Many people also like the idea of seeing their assets being put to use during their lifetime. But gifting is not always as straightforward as it may seem.

If you wish to make a gift in your lifetime this will in most cases be free of inheritance tax if you live for seven years after making the transfer.

If you die within seven years and your estate is worth more than £325,000 tax will be charged on the gift.

The amount of tax payable will be dependent on the size of the gift or gifts you have made.

There is a common misconception that gifts below the £325,000 threshold will be free of inheritance tax liability when that is not the case, how gifts work and relate to the threshold and when taper relief applies and when it does not is a complex area. So always take advice, if you are making lifetime gifts.

There is no limit on the amount of lifetime gifts that you make so this can be a tax-efficient way of transferring assets that you do not need to keep in your estate.
In these cases, it may also be possible to protect against the tax implications of an earlier death using a life assurance policy written in trust, which insures the potential tax liability during the 7 year period.

If you want to make gifts that are not impacted by the 7 year rule, there is still a lot you can do to reduce your inheritance tax liability.

Here are some examples:

  • Annual Gift Exemption:

    You can give away up to £3,000 in gifts each tax year. Any remaining annual examption can be carried over to the next tax year making the maximum annual examption £6,000

  • Wedding and Civil Partnership Gifts:

    There are different limits depending on your relationship to the bride or groom.

    • £5,000 for a child
    • £2,500 for a grandchild or great grandchild
    • £1,000 for anyone else
  • Small Gifts:

    You can give as many people as you like gifts of up to £250 a year. There are certain restrictions around this exemption.

    • It cannot be set against a gift of more than £250
    • You cannot give a person £250 if you have already given them a gift using another exemption
  • Regular Gifts:

    Regular gifts are exempt from IHT provided that the giver can maintain their normal lifestyle.

Gifting using these various exemptions can be significant over time and are not affected by the 7 year rule, allowing you to make substantial reductions
to your inheritance tax liability.

In addition, and this is often overlooked any gift between a married couple from one spouse to the other is exempt from inheritance tax, and this can open opportunities within your financial and legacy planning.

So, although gifting is far from straightforward, it remains a valuable part of inheritance tax planning and used with care and skill can be fundamental in reducing or eliminating a future tax liability.

We can help you devise a gifting strategy to maximize the value of your lifetime wishes whilst at the same time, minimizing the potential future tax payable.

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To speak to an IFA about Lifetime Gifting Exemption and estate planning, contact Tony Thomas on 07585 592494 or tony@ttwealth.co.uk

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