The UK government’s guidance on inheritance tax and gifts outlines how certain gifts made during a person’s lifetime can impact the inheritance tax (IHT) due upon their death.

Understanding Lifetime Gifts and Inheritance Tax

Gifting assets during your lifetime can be an effective way to reduce the value of your estate for IHT purposes. However, it’s essential to understand how these gifts are treated

• Potentially Exempt Transfers (PETs): Most gifts are considered PETs. If you survive for seven years after making the gift, it becomes exempt from IHT. If you pass away within seven years, the gift may be subject to IHT, depending on its value and timing.
• Taper Relief: If IHT is due on a gift and you die between three and seven years after making it, the tax rate may be reduced on a sliding scale:

Exemptions and Allowances

Certain gifts are immediately exempt from IHT, regardless of the seven-year rule:

• Spouse or Civil Partner Exemption: Unlimited gifts to your UK-domiciled spouse or civil partner are exempt.

• Annual Exemption: You can gift up to £3,000 each tax year without it being added to the value of your estate. If unused, this exemption can be carried forward one year, allowing a maximum of £6,000 in a single tax year.
• Small Gifts Exemption: You can give as many gifts of up to £250 per person per tax year, provided you haven’t used another exemption on the same person.
• Wedding or Civil Partnership Gifts: Gifts for weddings or civil partnerships are exempt up to:
  • £5,000 for a child
  • £2,500 for a grandchild or great-grandchild
  • £1,000 for anyone else
• Gifts Out of Income: Regular gifts made from your surplus income (after meeting your usual living expenses) are exempt, provided they don’t affect your standard of living. Proper documentation is essential to claim this exemption.

Gifts with Reservation of Benefit If you give away an asset but continue to benefit from it (e.g., gifting your home but still living in it rent-free), it’s considered a “gift with reservation.” Such gifts remain part of your estate for IHT purposes.

Record-Keeping and Documentation

Maintaining detailed records of your gifts is crucial. This includes:

• The date of the gift
• The recipient
• The value of the gift
• The nature of the gift (e.g., cash, property)

Proper documentation ensures that your executors can accurately report gifts to HMRC and claim any applicable exemptions.

Strategic Considerations

• Start Early: The earlier you begin gifting, the more likely you are to outlive the seven-year period, making gifts exempt from IHT.
• Utilise Exemptions: Make full use of annual and small gift exemptions each tax year.
• Document Gifts Out of Income: If making regular gifts from income, keep thorough records to demonstrate they qualify for the exemption.

How Jermyn & Co. Can Assist

Our team is here to guide you through the intricacies of estate planning and IHT:

• Personalised Advice: Tailored strategies to suit your unique financial situation and family dynamics.
• Comprehensive Planning: Integration of gifting strategies with your overall estate plan.
• Ongoing Support: Regular reviews to adapt your plan to changes in legislation or personal circumstances.

Give us a call today to plan ahead.