Gifting assets during an individual’s lifetime is commonly considered when someone is planning their future inheritance tax liability and providing for loved ones. It is important to know the rules to be able to plan effectively.
In this article, Ola Szymaniec, Solicitor in our Private Client team explains the different tax exemptions, common pitfalls and gives advice on lifetime gifting.
Types of tax exemptions:
There are several types of tax exemptions to be aware of, these include:
Potentially exempt transfers: most gifts made during someone’s lifetime will be a potentially exempt transfer. This means that in certain cases, an individual can make unlimited gifts which will become exempt if they survive seven years.
Annual exemptions: each tax year, HMRC allows for a number of tax-free gifts to be made. These include the annual exemption (£3,000), the small gift allowance (£250 per person) and gifts for weddings/civil partnerships (between £1,000-£,5000 depending on your relationship to the recipient).
Normal expenditure out of excess income: making regular payments to another person could count as being tax-free depending on the size of your estate and your spending behaviour.
Spousal and charity exemptions: most gifts between spouses and to charity are free of tax.
Some common pitfalls:
A common error that comes up when someone is creating a will or estate planning is concentrating too much on one aspect of gifting without considering the holistic impact of that gift.
A common example is wanting to gift a property, to reduce Inheritance Tax liabilities, without properly considering all the tax rules and implications.
There are plenty of other pitfalls we encounter, sometimes after someone has passed away and it is too late to correct the mistake. These include:
- Is the potentially exempt transfer a gift into a trust and have the trust rules and tax implications been considered
- How to calculate the tax when someone has made a gift within 7 years of passing away and have they considered how they could have reduced the risk when they made the gift
- How the different annual exemptions interact with each other and other tax exemptions
- What constitutes normal expenditure and excess income
- How to use the annual exemptions for minor and how you hold the property for them
- How does normal expenditure out of excess income affect the recipient’s ability to bring a claim against your estate
- Who might bring a claim against your estate because of a promise of a gift or an actual gift
- The impact of giving away a gift whilst retaining a benefit
- How capital gains tax and income tax interact with gifting and who bears the burden
- How gifting your assets will be viewed by the Local Authority when considering your ability to pay care home fees
Takeaway advice:
Whenever we advise on lifetime gifting within the context of estate planning, it is important to have in mind what someone is trying to achieve and what their goals are in the short, mid and long term. It is also important to consider the various rules and tax implications of one decision, as that one decision is unlikely to be self-contained.
If you have any questions or would like any further information on the content of this article, please do not hesitate to contact our Private Client team, by emailing [email protected] or calling us on 01737 854 500 and one of our team will be happy to assist.