Making gifts during your lifetime is an effective way to reduce the value of your estate for IHT purposes and, consequently, the amount of IHT payable in the event of your death. Gifting assets whilst you are alive, rather than waiting to gift assets via your Will could ensure that you ultimately pass on a much larger legacy to your loved ones.
Following the 2024 Autumn Budget, the Chancellor announced that from April 2027 unused pension funds and death benefits will now be included within an individual’s estate for IHT purposes.
Pensions are not normally subject to IHT, and therefore, the proposed changes could dramatically increase your estate's size, resulting in even more tax being payable in the event of your death.
Therefore, it may be more important than ever to commence your estate planning and consider making lifetime gifts as soon as possible to reduce your IHT burden.
What is a lifetime gift?
In the context of IHT, a lifetime gift (also known as a ‘potentially exempt transfer’ (PET)), is a gift of value which is given away during an individual’s lifetime.
Examples of lifetime gifts can include:
- Gifts of cash;
- Transfer of property;
- Gifts of shares, jewellery, artwork.
Lifetime gifting allows you to assist a child or others (for example by assisting a child onto the property ladder or funding your grandchild’s university fees), with the added bonus of reducing your IHT burden.
Is Inheritance Tax payable on lifetime gifts?
PETs are ‘potentially exempt’ from IHT as they will drop out of an individual’s estate (and are therefore tax-free) provided the individual survives the gift by seven years.
Gifts into certain types of trusts are treated differently to PETs and could be subject to IHT immediately.
Everyone has an IHT free allowance of £325,000 (called the ‘nil rate band’ (NRB)). This means that everyone can give away up to £325,000 IHT free on their death, or in the seven years before their death.
PETs made in the seven years before death can reduce an individual’s NRB.
For example, if you gifted £50,000 to your child and then died three years later, you would only be able to pass on £275,000 tax-free on your death. However, if you gifted £50,000 to your child and then died eight years later, you would be able to pass on £325,000 tax-free on your death.
Any gifts made in the seven years before death that exceed the value of £325,000 would eat up the entirety of the NRB and any gifts made above this value could be liable to an IHT charge up to the rate of 40%.
Exemptions and reliefs on lifetime gifts
Certain exemptions and reliefs apply to lifetime gifts to reduce the IHT liability linked with the gift:
- Annual exemption – you can give away up to £3,000 per tax year IHT-free. If the £3,000 allowance is not used, then it can be carried forward once to the following year.
- Spousal exemption – all gifts to spouses are IHT-free.
- Wedding gifts - gifts to children of up to £5,000, grandchildren or great-grandchildren of up to £2,500 and gifts to any other individual up to £1,000 can be made on marriage or civil partnership IHT-free.
- Small gifts allowance – each person can gift up to £250 per person, per tax year, to as many individuals as they wish, IHT-free.
- Charitable gifts - gifts made to UK-registered charities are IHT-free.
- Gifts out of excess income – regular gifts made from surplus income are IHT-free provided that:
- the gift is made from income (i.e. not capital);
- the gift forms part of your normal expenditure and is paid out regularly;
- you maintain your usual standard of living;
Example - How Gifting Can Reduce IHT
- It is 2025, Mr and Mrs Myerson are both 55, they have two children and have a combined estate of £5m.
- Mr and Mrs Myerson both die in February 2039 (14 years from now).
No lifetime gifting:
- Mr and Mrs Myerson each had an NRB of £325,000 and benefited from an additional tax -free allowance called a residence nil rate band (RNRB) of £175,000 (£1m IHT free).
- The remaining £4 million of their estate is taxed at the IHT rate of 40%.
- IHT payable on death: £1.6m.
The potential impact of lifetime gifting (example based on current IHT rates):
- Mr and Mrs Myerson utilise their annual exemption and gift £3,000 each year to their children and grandchildren for 14 years. They carry across the previous years’ annual exemption once (£3,000 x 15 = £45,000) x 2 = £90,000 IHT free.
- Mr and Mrs Myerson each gift £325,000 to each child in February 2025 and seven years later in February 2032. £325,000 x 4 = £1.3m IHT free.
- Both children get married, and Mr and Mrs Myerson gift each of them £5,000. Two of their grandchildren get married and they gift each of them £2,500 = £15,000 IHT free.
- Mr and Mrs Myerson have reduced their estate to £3.595m. They each had a NRB of £325,000 and each benefit from the RNRB of £175,000 (£1m IHT free).
- The remaining £2.595m of their estate is taxed at the IHT rate of 40%.
- IHT payable on death: £1.038m = tax saving of £562,000.
Key considerations when making lifetime gifts
Whilst gifting is a useful tool to reduce the value of your estate for IHT purposes, you should be mindful of the following:
7-year rule
You should always be mindful of the seven-year rule when making a lifetime gift. If you die within seven years of making the gift, this will become chargeable and may be liable for IHT.
Financial security and deprivation of assets
You should always ensure that you have sufficient funds to live off to maintain your current standard of living. It is important not to deprive yourself of assets, and you should ensure that you have adequate funds for future needs.
You should not deliberately deprive yourself of assets to evade care home fees. If the local authority considers that you have made lifetime gifts as a guise to evade care fees, the gifts may be investigated in the future.
Achieving equality between family members
If you have made lifetime gifts to certain family members during your lifetime but not to others, you may wish to achieve equality by equalising gifts in your Will.
Record keeping
You must keep a record any gifts made during your lifetime, including the amount gifted, when and to whom. This will provide valuable assistance for your executors who must determine your IHT position on your death.
Gifts with a reservation of benefit
If you retain a benefit in a gift (e.g. if you gift a property to your child but continue to live in the property rent-free), the gift will be ineffective for IHT purposes, and it will remain within your estate.
Gifting outright v gifting into trust?
You may wish to gift assets outright or gift assets into trust.
Trusts can be used to pass gifts to others without giving up control over the decisions regarding the assets.
The rules regarding trusts are complicated and are outside the scope of this article, but our team are here to assist should you wish to consider such issues in greater detail.
Contact Our Wills, Trusts and Probate Team
If you would like to discuss how lifetime gifting could help reduce your Inheritance Tax liability or need tailored advice on estate planning, our expert team is here to help. Contact our Wills, Trusts and Probate Team:
01619414000
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Kiera Goodwin
Solicitor
Kiera is a Solicitor in the Corporate team at Myerson and a member of the Financial Services and Manufacturing teams. Kiera has experience in a variety of corporate matters, including employee ownership trusts, share sales, share buybacks, employee share option schemes, company reorganisations, and other general corporate matters.
About Kiera Goodwin