Lifetime Gifting

Lifetime gifting is a powerful strategy for reducing inheritance tax liability in the UK while allowing you to see your loved ones benefit from your assets during your lifetime. This article explains the key rules, exemptions, and considerations for making gifts effectively.

Seven-Year Rule

The Seven-Year Rule is fundamental to understanding how gifts are treated for inheritance tax purposes.

How It Works

• When you make a gift to an individual, it becomes a Potentially Exempt Transfer (PET)
• If you survive for 7 years after making the gift, it becomes completely free of inheritance tax
• If you die within 7 years, the gift becomes chargeable to inheritance tax as part of your estate
• The tax due is calculated on a sliding scale based on how long you survive after making the gift

Taper Relief

If death occurs between 3-7 years after the gift, taper relief reduces the inheritance tax due:

• 3-4 years: 20% reduction (tax rate effectively 32%)
• 4-5 years: 40% reduction (tax rate effectively 24%)
• 5-6 years: 60% reduction (tax rate effectively 16%)
• 6-7 years: 80% reduction (tax rate effectively 8%)
• 7+ years: 100% reduction (no tax due)

Practical Considerations

• The seven-year period begins on the date the gift is made
• Multiple gifts are considered in chronological order when calculating tax
• Record keeping is essential - document all gifts, their value, and dates
• If multiple gifts exceed the nil-rate band, earlier gifts use up the allowance first

Annual Exemptions

Several exemptions allow you to make gifts free from inheritance tax, regardless of when you die afterward.

£3,000 Annual Exemption

• You can give away £3,000 worth of gifts each tax year without inheritance tax implications
• If unused, this allowance can be carried forward one year only
• Example: If you made no gifts last year, you could give away £6,000 this year free from inheritance tax

Small Gifts Exemption

• Gifts of up to £250 per person per tax year are exempt
• You can give these small gifts to any number of different people
• This exemption cannot be used for someone who has already received your annual £3,000 exemption

Wedding and Civil Partnership Gifts

Tax-free gifts can be made on the occasion of a marriage or civil partnership:

• Up to £5,000 from each parent to their child
• Up to £2,500 from each grandparent to their grandchild
• Up to £2,500 from one party of a marriage/civil partnership to the other
• Up to £1,000 from anyone else

Gifts from Normal Expenditure Out of Income

One of the most valuable but often overlooked exemptions:

• Regular gifts made from your surplus income (not capital) are exempt from inheritance tax
• These gifts must:
  • Form part of your normal expenditure
  • Be made out of income
  • Leave you with sufficient income to maintain your normal standard of living
• Examples include monthly payments to family members, regular premium payments for insurance policies, or contributions to savings accounts

Maintenance Exemptions

Gifts for the maintenance of:

• Your spouse or civil partner
• Your ex-spouse or former civil partner
• Relatives who are dependent on you because of old age or infirmity
• Children under 18 or in full-time education

Charitable Gifts

• Gifts to qualifying charities are completely exempt from inheritance tax
• If you leave at least 10% of your net estate to charity in your will, the inheritance tax rate on the remainder is reduced from 40% to 36%

Potentially Exempt Transfers (PETs)

Potentially Exempt Transfers are gifts between individuals that have the potential to become completely exempt from inheritance tax.

Key Features

• A PET is any gift made by an individual to another individual
• No immediate tax is payable when making a PET
• The gift only becomes exempt if you survive for 7 years
• Gifts to companies or most trusts are not PETs

Gift With Reservation Rules

• If you continue to benefit from a gift you’ve made, it’s considered a “gift with reservation”
• Such gifts remain part of your estate for inheritance tax purposes
• Example: Giving your house to your children but continuing to live in it rent-free

Avoiding Gift With Reservation Issues

• Pay a full market rent if you continue to use property you’ve given away
• Move out completely from a property you’ve given away
• Consider alternative planning strategies like a properly structured trust

Record Keeping Requirements

For all PETs, maintain records of:

• Description of the asset gifted
• Value at the date of the gift
• Identity of the recipient
• Date of the gift
• Any conditions attached to the gift

Chargeable Lifetime Transfers (CLTs)

Chargeable Lifetime Transfers are gifts that don’t qualify as PETs and may attract immediate inheritance tax.

What Counts as a CLT

CLTs typically include:

• Gifts into discretionary trusts
• Gifts to companies
• Gifts into most types of trusts

Immediate Tax Consequences

• CLTs above the nil-rate band (currently £325,000) attract immediate inheritance tax at 20%
• If you die within 7 years, additional tax may become due (up to a further 20%)
• Taper relief applies if death occurs between 3-7 years after the gift

Look-Back Period

• When calculating inheritance tax on death, HMRC looks back 7 years for PETs
• For CLTs, the look-back period can effectively be 14 years
• This is because CLTs made within 7 years before a PET can impact the nil-rate band available

Trust Planning Considerations

• Despite the potential tax charge, trusts offer control benefits
• Different types of trusts have different tax treatments
• Professional advice is strongly recommended before making substantial CLTs# Lifetime Gifting

Lifetime gifting is a powerful strategy for reducing inheritance tax liability in the UK while allowing you to see your loved ones benefit from your assets during your lifetime. This article explains the key rules, exemptions, and considerations for making gifts effectively.

Seven-Year Rule

The Seven-Year Rule is fundamental to understanding how gifts are treated for inheritance tax purposes.

How It Works

• When you make a gift to an individual, it becomes a Potentially Exempt Transfer (PET)
• If you survive for 7 years after making the gift, it becomes completely free of inheritance tax
• If you die within 7 years, the gift becomes chargeable to inheritance tax as part of your estate
• The tax due is calculated on a sliding scale based on how long you survive after making the gift

Taper Relief

If death occurs between 3-7 years after the gift, taper relief reduces the inheritance tax due:

• 3-4 years: 20% reduction (tax rate effectively 32%)
• 4-5 years: 40% reduction (tax rate effectively 24%)
• 5-6 years: 60% reduction (tax rate effectively 16%)
• 6-7 years: 80% reduction (tax rate effectively 8%)
• 7+ years: 100% reduction (no tax due)

Practical Considerations

• The seven-year period begins on the date the gift is made
• Multiple gifts are considered in chronological order when calculating tax
• Record keeping is essential - document all gifts, their value, and dates
• If multiple gifts exceed the nil-rate band, earlier gifts use up the allowance first

Annual Exemptions

Several exemptions allow you to make gifts free from inheritance tax, regardless of when you die afterward.

£3,000 Annual Exemption

• You can give away £3,000 worth of gifts each tax year without inheritance tax implications
• If unused, this allowance can be carried forward one year only
• Example: If you made no gifts last year, you could give away £6,000 this year free from inheritance tax

Small Gifts Exemption

• Gifts of up to £250 per person per tax year are exempt
• You can give these small gifts to any number of different people
• This exemption cannot be used for someone who has already received your annual £3,000 exemption

Wedding and Civil Partnership Gifts

Tax-free gifts can be made on the occasion of a marriage or civil partnership:

• Up to £5,000 from each parent to their child
• Up to £2,500 from each grandparent to their grandchild
• Up to £2,500 from one party of a marriage/civil partnership to the other
• Up to £1,000 from anyone else

Gifts from Normal Expenditure Out of Income

One of the most valuable but often overlooked exemptions:

• Regular gifts made from your surplus income (not capital) are exempt from inheritance tax
• These gifts must:
  • Form part of your normal expenditure
  • Be made out of income
  • Leave you with sufficient income to maintain your normal standard of living
• Examples include monthly payments to family members, regular premium payments for insurance policies, or contributions to savings accounts

Maintenance Exemptions

Gifts for the maintenance of:

• Your spouse or civil partner
• Your ex-spouse or former civil partner
• Relatives who are dependent on you because of old age or infirmity
• Children under 18 or in full-time education

Charitable Gifts

• Gifts to qualifying charities are completely exempt from inheritance tax
• If you leave at least 10% of your net estate to charity in your will, the inheritance tax rate on the remainder is reduced from 40% to 36%

Potentially Exempt Transfers (PETs)

Potentially Exempt Transfers are gifts between individuals that have the potential to become completely exempt from inheritance tax.

Key Features

• A PET is any gift made by an individual to another individual
• No immediate tax is payable when making a PET
• The gift only becomes exempt if you survive for 7 years
• Gifts to companies or most trusts are not PETs

Gift With Reservation Rules

• If you continue to benefit from a gift you’ve made, it’s considered a “gift with reservation”
• Such gifts remain part of your estate for inheritance tax purposes
• Example: Giving your house to your children but continuing to live in it rent-free

Avoiding Gift With Reservation Issues

• Pay a full market rent if you continue to use property you’ve given away
• Move out completely from a property you’ve given away
• Consider alternative planning strategies like a properly structured trust

Record Keeping Requirements

For all PETs, maintain records of:

• Description of the asset gifted
• Value at the date of the gift
• Identity of the recipient
• Date of the gift
• Any conditions attached to the gift

Chargeable Lifetime Transfers (CLTs)

Chargeable Lifetime Transfers are gifts that don’t qualify as PETs and may attract immediate inheritance tax.

What Counts as a CLT

CLTs typically include:

• Gifts into discretionary trusts
• Gifts to companies
• Gifts into most types of trusts

Immediate Tax Consequences

• CLTs above the nil-rate band (currently £325,000) attract immediate inheritance tax at 20%
• If you die within 7 years, additional tax may become due (up to a further 20%)
• Taper relief applies if death occurs between 3-7 years after the gift

Look-Back Period

• When calculating inheritance tax on death, HMRC looks back 7 years for PETs
• For CLTs, the look-back period can effectively be 14 years
• This is because CLTs made within 7 years before a PET can impact the nil-rate band available

Trust Planning Considerations

• Despite the potential tax charge, trusts offer control benefits
• Different types of trusts have different tax treatments
• Professional advice is strongly recommended before making substantial CLTs

FAQ