Lifetime gifting is on the rise. That is not surprising, as nowadays children need a financial helping hand to get them on the property ladder. However, when parents give cash to their children they often do not know the UK rules on ‘’what is a lifetime gift’’.

As Cheshire Wills and Probate solicitors, it is important to us that parents and other benefactors with estates that will be potentially liable to inheritance tax, as well as the children receiving the benefit of the lifetime UK gift, understand the complex inheritance tax rules so that they can make informed decisions.

According to HMRC research, 13% of the UK population have made a lifetime gift of £1,000 or more in the last two years .Just under half of the lifetime gifters said that they did not know the inheritance tax rules on UK lifetime gifts before making the gift.

What is a lifetime gift UK?

The definition of a ‘’lifetime gift UK‘’ is relatively simple. It is a gift, given without ‘’strings‘’ or conditions for its return to a beneficiary during a donor’s lifetime. A gift made in a Will is a legacy that is only effective after the donor’s death.
Cheshire Wills and Probate solicitors say that whilst the definition of a lifetime gift UK may be straightforward, inheritance tax rules on lifetime gifting are not.

Lifetime gifting UK and the annual exemption and small gifts

Current inheritance tax rules say a donor is entitled to give £3,000 in gifts each year exempt from inheritance tax.

Lifetime gifting UK and the seven-year rule

If a donor wants to give more than £3,000 away in a year, they can do so. However, unless the gift falls within one of the HMRC recognised exceptions, it could become subject to inheritance tax when the donor dies under the “seven-year rule”.

For example, if a parent gives a child £40,000 for a house deposit then there may be an ‘‘inheritance tax time bomb’’ if the parent does not survive for seven years after the transfer of the gift. That is subject to size of the parent’s estate, the availability of the parent’s inheritance tax nil rate band for lifetime gifts and the residence nil rate band.

Lifetime gifting UK and the small gifts exemption

Cheshire Will and Private Client solicitors say that gifters are entitled to use the ‘’small gifts exemption’’ to give up to £250 to as many people as they choose. However, the small gift exemption cannot be used with the annual gift exemption. It also cannot be used to reduce large gifts made to an individual.

Lifetime gifting UK, marriage, and civil partnership

Under current rules, parents can give up to £5,000, grandparents £2,500, and anyone else £1,000 to a couple who are getting married or entering a civil partnership, without future inheritance tax consequences.

Lifetime gifting UK to a spouse or civil partner

Gifts to a spouse or civil partner are normally inheritance tax free, subject to the proviso that the couple must have the same domicile.

If one partner is UK domiciled and the other is not, then complicated inheritance tax rules and exemptions apply.

Lifetime gifting UK and normal expenditure out of income

This exemption allows a donor to make regular gifts from surplus income (not from capital or the sale of property). Gifts from surplus income are inheritance tax free on death, even if the donor dies within seven years of transferring the gift.

Cheshire Private Client solicitors recommend that professional advice is taken on the definition of “normal expenditure” and “income” to avoid future difficulties with proving that the gifts were made out of income and as part of the donor’s normal expenditure.

Lifetime gifting UK and family maintenance

The family maintenance exemption allows donors to make gifts for a spouse or civil partner’s maintenance or for the maintenance, training or education of children under eighteen, free of future inheritance tax.

Lifetime gifting and exceptions

Other major exception to lifetime gifting and potential payment of inheritance tax are lifetime gifting made to organisations, such as:

  • Charities;
  • Gifts to the nation for national purposes ;
  • Political parties (if they qualify).

Lifetime gifting UK legal advice

Lifetime gifting is undoubtedly a lovely thing to do to help friends and family. However, Cheshire Wills and Private Client solicitors recommend that lifetime gifting should only be undertaken after taking detailed estate planning legal advice and once the potential inheritance tax implications are understood. Just as importantly, solicitors advise that lifetime gifting UK is not an alternative to preparing a Will.

For advice about lifetime gifting and estate planning or for information about drawing up a new Will please call Chris Strogen on +44 (0) 1477 464020 or email Chris Strogen at [email protected].