Inheritance Tax Planning & Lifetime Giving

30 July 2021

As more parents and grandparents face the realisation that a significant portion of their estate will be lost to inheritance tax when they die, many are discussing ways to reduce this tax burden.

Gifting cash or assets to children or grandchildren during lifetime is one option, and one that gives great pleasure to many, but it is important to do this as part of a planned and structured approach to avoid creating additional problems.

How much can I gift tax-free?

The tax regime around gifting allows certain gifts to be made in lifetime with no inheritance tax consequences. For example £3,000 can be gifted per individual each tax year, tax-free. Provided certain criteria are met, gifts made out of surplus income are also tax-free.

Gifts over £3,000 – the seven year rule

Larger gifts and those that are not classed as tax-free are known as “ Potentially exempt transfers “ as they become tax-free if the person making the gift survives seven years from the date of the gift. If they die within the seven years, the gift will be subject to inheritance tax.

Are there any risks of lifetime giving?

For those concerned about inheritance tax on death, it may seem sensible to make substantial gifts to their children sooner rather than later. The reality, however, is that such an approach can be more problematic than advantageous for many reasons.

With life expectancies continuing to rise, there is a real risk that too much is gifted too soon, and much needed funds for care, treatment or accommodation in old age are no longer available.

Family circumstances can change, with funds leaving the family when children divorce. An already difficult time becomes far more distressing when family inheritance is involved.

Providing a significant amount of funds too early to a young adult can lead to poor decision making or a lack of motivation to be personally successful. Often this can result in a long term negative impact on the recipient of the gift.

Should I avoid lifetime giving altogether?

There is certainly a balance between gifting too much too soon, and not gifting at all. Parents and grandparents who do not gift at all during lifetime may have accumulated significant wealth only to find they are too elderly to then enjoy it. The same can be said for leaving everything to children who then only inherit when they themselves are in their later years and unable to fully benefit. This also comes with the added burden of a potentially large inheritance tax bill for the beneficiaries.

Lifetime giving is one of many strategies to be used when considering inheritance tax planning and used sensibly and perhaps alongside other planning methods, it can be very effective and more importantly extremely rewarding.

For more information on how best to approach lifetime giving in respect of your own inheritance tax planning, please contact us.

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