Inheritance Tax Planning: Making gifts in your lifetime

You may have come to a point in your life where you have amassed a large amount of capital and have more than you reasonably need to live off. If you are considering how you can give away your excess wealth effectively, there are a number of factors to consider.

Gifting can reduce the value of your estate and therefore can minimise your liability to Inheritance Tax (IHT) on your death.

You may be aware that you are able to give away £3,000 tax free in each tax year without having to survive the gift by any length of time. However, what if you want to give away a larger sum?

You are able to make gifts of larger amounts of money to other individuals. A gift made by an individual to another individual is known as a potentially exempt transfer (PET). These gifts are “potentially” exempt, because if the person making the gift survives by seven years from the date of making the gift, the gift becomes fully exempt for IHT purposes and is not included in the value of their estate when they die.  

If the person making the gift was to die within the seven years, it becomes chargeable and will use up part or all of the person’s nil rate band, depending on the value of the gift. The longer the person survives making the gift, the lower the IHT payable. As long as the person survived making the gift by at least three years, taper relief will apply and is calculated as a percentage depending on the length of time the person survived making the gift by. 

Due to the seven year rule, careful consideration must be given when deciding whether to make a gift. For example, you will need to take your long term needs into account, as well as your age and life expectancy.

Gifts to certain individuals or organisations can be exempt from IHT if certain conditions are satisfied. For example, gifts to a spouse or civil partner, gifts to charities and gifts to political parties.  

If you would like to discuss lifetime giving in more detail with one of our experts, please get in touch.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter. 

Charlotte Drury-Woods
Partner, Head of Private Wealth & Inheritance
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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