Making financial gifts during your lifetime (Part 1)

If you are fortunate enough to have financial security, and more money than you need to live comfortably, then you may want to pass on some of your wealth to your family and friends while you are still alive. Making gifts to loved ones during your lifetime can be immensely rewarding and tax efficient, but it is important to be aware of the rules that dictate what you can and cannot do and the problems that can arise if you do not take proper advice.

In the first part of a two-part series of articles on this subject, Rachel Saunders, wills and probate specialist at Forrester Sylvester Mackett LLP explains why lifetime gifts might benefit you and what you can safely give away each year.  A second article will look at the slightly more complicated rules around potentially exempt lifetime transfers.

Why might I want to make gifts during my lifetime?

If the value of your estate (any property, money or other assets you own) is likely to exceed the threshold at which inheritance tax becomes payable, you may be able to take advantage of rules which allow you to give away some of your wealth during your lifetime without paying some, or all, of the inheritance tax that would be payable when you die.

The inheritance rules are complicated, but:

  • you can leave up to £325,000 tax free, as sums up to this amount fall into what is known as the ‘nil rate band’ for inheritance tax purposes;
  • this threshold can be increased to £425,000 for the tax year 2017/2018 (rising to £450,000 for 2018/2019, £475,000 for 2019/2020 and  £500,000 for 2020/2021) if you choose to leave your main home, or the proceeds of sale from it, to your children or grandchildren;
  • gifts to spouses, civil partners, charities and community amateur sports clubs are exempt from inheritance tax and are therefore excluded when determining how much your estate is worth;
  • married couples or civil partners whose personal estate is worth less than £325,000 (and who therefore do not use up all of their nil rate band when they die) can pass on any unused allowance to the surviving spouse or partner so that, when they die, they will be allowed a tax free allowance of £325,000 plus whatever part of your allowance you did not use, up to a maximum allowance of £650,000 (and note the increased threshold for gifts of your main residence can also be passed on);
  • where inheritance tax becomes payable, tax will be applied at 40 per cent unless there are any reliefs that can be claimed, such a business relief for business assets or agricultural relief for farms and woodland; and
  • if you give away 10 per cent or more of your estate to charity, the rate at which inheritance is charged will be reduced to 36 per cent.

How much can I give away during my lifetime?  

 You can give away:

  • £3,000 each tax year by taking advantage of your annual exemption allowance, with provision included to allow one year’s exemption to be rolled over to the next year if it is not used, meaning that if you do not gift £3,000 in this tax year, you can gift £6,000 in the next tax year;
  • as many gifts of up to £250 a year as you like, provided they are given to different people and you have not already given those people a gift using up another exemption;
  • normal gifts out of your income, for things like birthday and Christmas presents, provided the amount given does not affect your standard of living, i.e. it is surplus to your own income needs;
  • wedding or civil ceremony gifts of between £1,000 to £5,000, depending on who the recipient is and their relationship to you;
  • an unlimited amount of money to help fund a relative’s living costs; or
  • unlimited gifts to charities or political parties.

Specialist legal advice can help you determine the gifts that can be made to take maximum advantage of the exemptions and allowances available, while still ensuring that you are able to continue to enjoy your current standard of living and to meet any future care costs or unexpected expenses, should these arise.

For advice on inheritance tax planning, or any other wills, estate or probate matter, please contact Rachel Saunders on 01793 522 688.

The contents of this article are for the purposes of general awareness only. They do not constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.

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