Lifetime gifts – inheritance tax planning

Generally, any lifetime gift from one individual to another is a potentially exempt transfer (PET) and as the name suggests, the gift is potentially exempt from an inheritance tax charge (IHT). The gifts will be taxable only if the donor dies within seven years of making the transfer.

When a PET fails many are unaware that it is the recipient who pays the tax. Taper relief rules are also often misunderstood. The taper reduces only the amount of tax payable on the gift not the value of it, with no tax saving if the gift bears no tax (if it is within the nil rate band).

Where gifts are made to two or more individuals at different times, the nil rate band is applied in a chronological order, so the earliest gift first. This can result in some gifts being tax free and others taxed in full. This can cause an inequality between the amounts given away leading to family friction.

Typical year end IHT planning should ensure that you make the most of the exemptions that apply only to lifetime transfers, which are: 

• Annual gifting allowance at £3,000 per year, if not used in the previous year, this can be carried forward for one year, to a maximum of £6,000
• Small gifting allowance of £250 to the same person in any year. This can be to any number of people each year and is intended to avoid gifts and presents being caught by the IHT regime 
• Normal expenditure out of income, these are unconditional gifts that form part of your usual annual expenditure out of income 
• Gifts in consideration of marriage, subject to limits depending on the relationship   

Please feel free to talk to us if you need assistance with IHT planning.