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Gifting during your lifetime can reduce the inheritance tax bill

View profile for Philip Nelson
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Gifting during your lifetime can reduce the inheritance tax bill

Inheritance tax is often thought of as a tax that only applies on death. Its scope, however, is wider than that. Its predecessor was called capital transfer tax, which is closer to the mark. Whilst it is mainly payable on death, it is also relevant in relation to lifetime gifts. Many people have heard of ‘the 7 year rule’ but it is worth considering how that actually works in practice.

Firstly, it is important to think about whether inheritance tax is actually relevant to you. As in a previous article, a married couple with children can have up to a £1m of assets before any inheritance tax is due. Therefore, if you have assets within the taxable thresholds, there would be no inheritance tax and so you do not need to consider reducing your estate.

If your estate is taxable, then gifting is worthwhile. You can give away as much as you wish, the government does not impose limits on gifts and you do not need to report gifts (except certain ones into trust) when then they are made. 

The gifts remain taxable in your estate for 7 years from the date of the gift. The value of the gift remains the same throughout the 7 year period and does not reduce. If you die within the 7 year period your executors have to pay inheritance tax taking account of the value of the gift. 

There are certain exemptions. You can give away £3,000 per year tax free – it may not sound a lot but a married couple could gift £60,000 over 10 years tax free. 

You can give away surplus income providing you do so regularly, this can be useful if someone has a significant income as it stops their estate building up. The rules need to be understood and so advice is needed before using this rule.

Gifting can be useful even if the person does not or is unlikely to survive the 7 years.  It fixes the taxable value of the gift on the date it is made; so if the asset increases you are only taxed on the lower amount; also, it means that the person receiving the money can use it then, rather than waiting for their inheritance.

Having said that, it is important to make gifts when you are ready to do so and to enjoy the money whilst you can. Gifts made in small amounts over years can make a real difference.

There are lots of things to think about in making gifts and therefore it is important to take advice before going ahead, to avoid pitfalls. 

If you think it might be beneficial to take professional advice on how best to use lifetime gifting as part of your overall inheritance planning, please contact our Private Client team, who will be happy to help.

Our articles are intended for general information purposes only and are not a substitute for professional advice tailored to your specific circumstances. We are always very happy to discuss any plans, issues or concerns you may have and to clarify how we might be able to help. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.