Making financial gifts during your lifetime (Part 1)

If you are fortunate enough to be financially secure, have more money than you need to live comfortably now and maintain your accustomed quality of life during your later years, then you may want to pass some of your wealth to your family and friends while you are still alive. Making gifts to loved ones during your lifetime can not only be rewarding but also tax efficient. It is, however, 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, Dhruva Patel, wills and probate specialist with Berry & Lamberts Solicitors based in Sevenoaks, explains why lifetime gifts might benefit you and what you can safely give away each year. A second article, in November, 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 net value of your estate at the date of your death is likely to exceed the value at which inheritance tax becomes payable, you may be able to take advantage of rules which allow you to gift 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 tax rules are complicated, but:

• Each person can gift up to the value of the current “Nil Rate Band”, which at the moment is £325,000, without incurring inheritance tax;
• This tax free sum 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). This is known as the “Residence Nil Rate Band”, and could be available 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 you may gift any value (without limit), without incurring inheritance tax charges;
• If on the death of the first spouse or civil partner, their entire estate or a proportion is left to the surviving spouse or partner, any unused portion of the Nil Rate Band can be transferred to the surviving spouse or partner’s estate. This means that when the surviving spouse or partner dies, their estate will benefit from potentially a double value Nil Rate Band which is currently maximum of £650,000 or £850,000 if the Residence Nil Rate Band is available;
• Where inheritance tax becomes payable, tax will be charged at 40% unless there are any reliefs that can be claimed, such a business property relief for business assets or agricultural property relief for farms and woodland; and
• If you give away 10% or more of your estate to charity, the rate at which inheritance is charged will be reduced to 36%.

How much can I give away during my lifetime?

You can give away:

• £3,000 in total each tax year by taking advantage of your annual exemption allowance. You can roll over any unused allowance to the following year, which means that if you do not gift £3,000 in the current tax year, you can gift £6,000 in the next tax year;
• An unlimited amount of gifts of up to £250, provided that they are not gifted to people that you have already given to, using up another exemption;
• Gifts out of your income, provided the amount given does not affect your standard of living and 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 how to best plan during your lifetime, achieving the maximum advantage by using the various exemptions and allowances available to limit your inheritance tax liability, while still ensuring that you are able to continue to enjoy your current standard of living and 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 Dhruva Patel on 01732 460565 or email dpatel@berryandlambert.co.uk.

The contents of this article are for the purposes of general awareness only. They do not purport to 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.