Lifetime gifting: How to decide what, when, and who

“Lifetime gifting” describes the process of giving money and assets to your beneficiaries – usually children or grandchildren – before you pass away.

It is a common tactic to reduce the Inheritance Tax (IHT) due on an estate, as most (but not all) financial gifts will be removed from your estate once given to another person.

When discussing lifetime gifting with our clients, we tend to focus on the “what” and the “when”. What are you going to give away, and when is it sensible to do so?

Nevertheless, there’s another component that is often overlooked but equally important: who is going to give the gift.

Keep reading to discover why the “who” matters just as much as the “what” and “when” if you’re hoping to give money away in your lifetime.

Why the “what” and “when” are often the primary focus for lifetime gifting

HMRC has clear and established rules for how much you can give away tax-free and over what time frame.

Here’s a brief recap of what you need to know.

What you can give

If you are making gifts from “capital” – savings, investments, your pension, or assets – there is a £3,000 annual exemption, which can be spread across as many beneficiaries as you like. Those who receive money under your annual exemption can’t then receive gifts under a different exemption in the same year.

If you give more than £3,000 in any given year, this is known as a potentially exempt transfer (PET). These gifts are exempt from IHT, provided you do not pass away within seven years of giving them. If you do, they could attract IHT, with the normal rate being tapered depending on the number of years between the gift being made and the time you pass away.

Read more: What exactly is the “seven-year rule” for Inheritance Tax, and how does it work?

You can also give away a potentially unlimited amount from “surplus income”, or in other words, money you receive regularly and don’t need. As an example, if you regularly have £200 a month left over after paying your bills, enjoying your lifestyle, and contributing to your savings, this would be considered “surplus income” and could be gifted IHT-free.

Importantly, all financial gifts should be recorded meticulously so that HMRC can see when they happened and how much was given.

You could:

• Make a spreadsheet containing all transactions, recipients, and dates
• Clearly reference the gift when completing the bank transfer
• Put your gifting arrangements in writing and have the recipient acknowledge them in writing too.

Without clear records, the executor of your will could struggle to prove that the gifts were tax-efficient, potentially causing your IHT bill to be higher than necessary.

When you can give it

The annual exemption renews at the beginning of every tax year. You can carry forward any unused exemption from the previous year, increasing the maximum you could give to £6,000 in one year.

Given the seven-year rule for PETs, it is clearly beneficial to make lifetime gifts earlier in life.

That said, the ideal timing for a gift will depend on a number of factors:

• Your own financial circumstances. If you’re about to retire, for example, you may need to carefully assess your financial situation before helping others. MoneyAge reports that 1 in 7 parents are willing to have a more modest retirement to help their children. However, with forward planning, it may be possible to achieve the retirement you want and give money away.
• Your beneficiaries’ life goals. For instance, if they are hoping to buy a house in the next five years, you may decide to offer support in accordance with their desired time frame.

Working with a financial adviser could help you to establish an appropriate plan, aligned with your children’s and grandchildren’s needs, and work out how much you can afford to give away.

If you are married or in a civil partnership, you could both make use of gifting opportunities

Now, let’s come to the “who”.

Assets given to your spouse or civil partner are exempt from IHT, no matter the timing or the amount.

So, by sharing the load and making gifts as a couple, rather than on your own, you could effectively double your tax-free gifting opportunities and potentially reduce the IHT levied on both your estates when you die.

If you are not married, this strategy does not apply – no matter how long you have been together or whether you share assets, unmarried partners are still considered beneficiaries for IHT purposes.

While the spousal exemption is one of the key strategies you could employ when making lifetime gifts, there are other factors at play that could inform who is best placed to give the gift.

2 important factors that will help you determine who should give the gift

1. Age

Although there is no guarantee as to how long a person will live, logic dictates that the younger a person is, the less likely they are to pass away within the next seven years.

So, if you are deciding between you, your spouse, or even your parent as the gift-giver to the younger generation, consider age in relation to the seven-year rule for IHT.

2. The size of the individual’s estate

Although spouses will likely benefit from gifting as a united front, estates are assessed for IHT on an individual basis.

This matters because if one spouse or civil partner has a much bigger estate than the other – a larger pension, or several properties – they might benefit much more from reducing the size of their estate for IHT purposes.

Work with a Caliber financial adviser to put your family’s money in the hands of the next generation

We understand that you want to keep as much of your hard-earned money as possible in the hands of your family, not HMRC.

At Caliber, we will support you to create an estate plan that puts your family’s needs first, which may include strategic lifetime gifting to the benefit of multiple generations.

To get started, email contact@caliberfm.co.uk or call 01525 375286 to speak to one of our team today.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.