Inheritance tax can be a complex and daunting subject for those who are considering passing on their wealth to their loved ones. However, understanding that there are allowances and exemptions available can help ease some of the worry. One strategy to minimise inheritance tax is through the making of lifetime gifts.
A lifetime gift is the act of giving away assets or money to family members or other individuals during a person’s lifetime. Spouses are typically exempt from these rules. Depending on the size of a person’s estate, making these gifts can effectively reduce the value of their estate and potentially any inheritance tax liabilities. However, it is important to understand the rules surrounding lifetime gifts to ensure that they are followed correctly, especially if you are making gifts in your capacity as an attorney or deputy. It is important to seek advice from a professional to plan accordingly.
7-year rule
One of the key rules is the ‘seven-year rule’. If an individual survives for at least seven years after making a gift, it is exempt from inheritance tax. This means that the value of the gift will not be included in the individual’s estate for inheritance tax purposes. However, if the individual does not survive seven years, this amount will be reduced from the deceased’s Nil Rate Band (‘NRB’). If the gift is over the amount of NRB available, the receiver of the gift will have to pay inheritance tax on the amount exceeded. The rate of the inheritance tax will depend on how long ago the gift was made and whether the NRB has been exceeded. If a person died within 5 years of the gift, the inheritance tax due will be less than if they died within 1 year of the gift; this is known as ‘taper relief’.
There are also certain allowances and exemptions available with lifetime gifts. For example, there is a yearly exemption of £3,000 per person. This means that an individual can gift up to £3,000 per year without it being subject to inheritance tax. In addition, any of the previous year’s unused exemption can be carried forward but only for that one year.
Besides the above exemption, there are specific exemptions for certain types of lifetime gifts. These exemptions include gifts to spouses, civil partners, charities, and political parties. Small gifts of up to £250 per individual can be made without incurring any tax liability, and other exemptions are available such as on a child or grandchild’s marriage.
Making gifts on behalf of a loved one – Attorneys and Deputies
The rules surrounding lifetime gifts differ when the person actioning the gift is an attorney or deputy on behalf of someone who lacks capacity. An attorney or deputy may, in some circumstances, make gifts in line with the wishes and feelings of the person whose finances they are looking after. The gifts may also be made to help preserve relationships with family members or friends.
Deputies and attorneys must, however, be aware of the strict rules governing gifting which is governed by the Mental Capacity Act 2005. Powers to gift are limited, and deputies and attorneys may need to seek authority from the Court of Protection. Gifts can only be made in certain circumstances, such as for a birthday or Christmas. Gifts must be made to a connected person, must be reasonable, affordable and in the donee’s best interests.
Lifetime gifts can be an effective way to minimise future inheritance tax liabilities, meaning your loved ones will benefit more from your estate. When considering lifetime gifts, it is important to seek professional advice.
Solicitors, accountants and tax advisers will be in the best position to help you navigate the complexities of inheritance tax and ensure that gifts are made in a tax-efficient manner. Additionally, they can provide you with guidance on the allowances and exemptions, as well as help people create an estate plan that aligns with your wishes.
