Lifetime Gifts – Inheritance Tax (IHT)
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It’s not just the assets we own on death that attract IHT – gifts made in our lifetime may too…
Subject to various allowances and reliefs, gifts made during our lifetime may be added to the value of those assets that comprise our estate when it comes to calculating the Inheritance Tax (IHT) chargeable to our estate. These gifts are known as Potentially Exempt Transfers or PETs.
What is the PET 7 year rule?
Any gifts made more than 7 years prior to your death are free of tax – irrespective of the amounts involved.
Then, gifts made within 7 years have a sliding scale of reduced tax due. That sliding scale is called ‘taper relief’.
| TAPER RELIEF | |
| Years before death | Rate of IHT |
| 0 to 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 + years | 0% |
Who pays IHT on Lifetime Gifts?
If the total of the gifts made during the 7 years prior to your death are less than the nil rate band (£325,000), then the estate will normally meet the IHT attributable to the lifetime gifts.
However, if the total of the gifts is more than the nil rate band, then the recipients of those gifts will be liable to meet the IHT due on the gifts.
Lifetime Gift allowances
There are various allowances as follows:-
- Annual allowance – £3,000 (‘annual exemption’). This is in total, not per person. You can carry over 1 years unused allowance to the next tax year
- Small gift allowance – £250 per person, as long as you have not used up another allowance on the same person(s)
- Weddings – £5,000 to a child; £2,500 to a grand or greatgrandchild; £1,000 anyone else. This applies to civil partnerships also.
- Payments out of income – this might be (eg) paying your child’s rent. It must be a regular payment and something which is clearly within your income means. You can use this for persons who have benefited from other allowances other than the small gift allowance.
You set a 7 year clock ticking when you make a lifetime gift…
What counts as a gift/PET?
The Govt website confirms gifts to include:
- Money
- Household and personal goods
- A house, land, or buildings
- Stocks and shares
- Unlisted shares you held for less than 2 years before your death
- A sale at undervalue (the balance v market value)
What does not count as a gift/PET?
Gifts to a spouse or civil partner do not count as PETs and are free of IHT. The same is true for gifts to charities, and political parties.
What is a Gift with Reservation of Benefit?
A gift with reservation of benefit (sometimes referred to as a GROB) is where you purport to give something away, but you retain some or all of the ‘enjoyment’ of that asset. For example, you might announce that you are gifting a painting to your children, but it remains in your house and you continue to enjoy admiring it.
If a GROB is made, and it can be shown that you have indeed retained the benefit, the gift will be chargeable to IHT in its full amount, and the 7 year taper relief rules will not apply.
How to get over the GROB rules
So, in the example above (of a supposed gift of a painting) your children must take the painting and so you no longer enjoy its benefit.
One way of getting over GROB issues is to pay a ‘market rent’ for the item in question. So returning again to the painting example, it is OK to keep it at your house and continue to enjoy it, BUT, you must pay a market rent to the new owners – your children in that example.
Expert Estate Planning Solicitors
We hope you have found this and our many other articles helpful. Please remember that it is not intended to be legal advice specific to your particular circumstances, and it (and any comments posted) should be taken as such. Our expert estate planning/probate solicitors are here to help if would like one to one advice – so please reach out by email, contact form, or phone.
Are lifetime gifts treated in isolation, or calculated as part of the over estate and related IHT burden?
Following a super query raised by a QLAW visitor, we just wanted to clarify that a lifetime gift (potentially exempt transfer or PET) does NOT give rise to an immediate Inheritance Tax (IHT) charge. Further, when it comes to calculating the IHT charge on death, subject to the application of Taper (or other) relief & exemption, the PET is simply treated as an asset of the estate, and the overall IHT burden calculated on it. The query kindly raised by the QLAW visitor was whether PETs were treated in isolation and outside of the overall estate (and related IHT burden).