With the festive season in full swing and trying to think of the perfect gift, many of us might consider financial gifts to loved ones. Gifting can be a generous way to share your wealth, while also mitigating potential Inheritance Tax (IHT) liabilities. However, it’s important to know the rules and allowances that surround lifetime gifting, so you can be certain that your gift doesn’t make you say bah humbug!

The law as it stands

Lifetime gifting refers to the transfer of assets or cash to another person during your lifetime. This can be a thoughtful way to support family members, contribute to significant life events, or simply share your wealth. From a tax perspective, lifetime gifting can also play a key role in reducing the value of your Estate, which may be subject to IHT upon your death.

IHT in the UK is currently charged at a rate of 40% on death on the value of an Estate that exceeds the tax-free threshold, more commonly known as the nil-rate band (NRB), which is £325,000 per individual. There is also an additional residence nil-rate band (RNRB) of up to £175,000 if the Estate includes a main residence and is passed to direct descendants, such as children or grandchildren. The unused NRB and RNRB can be transferred between spouses, should the first spouse to die not use up all of their tax-free allowances. This is often achieved by leaving their entire Estate to their surviving spouse (and therefore forgoing any IHT liability at the time of the first death). This means that, under the current rules, some Estates can pass up to £1million tax-free to their beneficiaries on the second death.

However, if you make a gift in the seven years prior to your death, your NRB may be reduced by the value of the gift, which in turn could have a substantial impact on the IHT position of your Estate.

There are some exemptions to this, which include:

• Giving away the annual exemption of £3,000 per tax year (in total – not per gift) which allows the gift to pass without being counted for IHT purposes. Further, if the allowance is unused in one year, it can be carried forward to the next, allowing for a maximum of £6,000 to be gifted tax-free;
• You can give up to £250 per year to any number of individuals, provided those individuals do not receive any more than £250 from you in the same year;
• You can give a tax-free wedding gift of £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to any other person.
• If you want to give away a larger gift that exceeds the annual exemption thresholds, these are treated as Potentially Exempt Transfers and if you survive 7 years from the date of making the gift then the asset no longer forms part of your Estate, so the sooner you can make the gift, the better!

Gift with Reservation of Benefit

However, there’s one sure fire way to fall foul of the existing lifetime gifting rules and that is the dreaded phrase: Gift with Reservation of Benefit (GROB). The law surrounding GROBs have been in place since the Finance Act 1986, which introduced anti-avoidance provisions in relation to IHT.

A GROB arises when an individual gives away an asset but continues to enjoy some benefit from it after the transfer. One of the most common gifts that a GROB applies to is that of property. Many people are operating under the false assumption that they can put their property into their children’s name and therefore it will no longer form a part of their Estate and, therefore, removing a large chunk of wealth for IHT purposes. However, if the donor continues to derive a benefit from the property, whether that be continuing to live in it or obtaining a rental income from it, the value of the gift will remain within the donor’s Estate and form part of that Estate’s IHT calculations regardless of whether you have survived 7 years. Not such a Merry Christmas after all!

The only time a retention of benefit in a property is disregarded under the GROB rules is if full consideration in money was given for the property (and so no gift took place) or if you continue to pay market rent to remain in the property – which, considering today’s rental market, might offer even less festive spirit than paying IHT…

Keep a record of those Christmas gifts

To be certain that your gifts qualify for IHT exemptions, and to ensure that the Executors of your Estate aren’t left trawling through your bank accounts to identify gifts, it is essential to maintain clear records of any and all gifts that you make in your lifetime. Keep a note of the date, the amount gifted and the recipient of the gift. This will help those administering your Estate to provide clear and concise evidence to HMRC, should they have any questions about your Estate and potential IHT liabilities.

How we can help

The rules around lifetime gifting are complex, so to make sure that you don’t have a Nightmare Before Christmas, please contact us to speak to a member of our Private Wealth & Inheritance Team about effective Estate planning.