The upcoming changes to Inheritance Tax (IHT) have caused many to give their current financial structures a thorough review in order to mitigate the potentially steep bill.
Gifting has always been an effective measure of circumventing IHT, but the new changes have caused the amount to be gifted to reach unprecedented levels.
Are your children set to benefit from more wealth and power much younger, or are there concerns that gifting may not be the most effective solution?
Why is so much being gifted to the next generation?
When timed correctly, gifting can result in assets being passed down to the next generation without falling under the scope of IHT entirely.
Unfortunately, the timing is largely dependent on when you actually die and this is not something that typically falls within a person’s control.
The most important rule for lifetime gifts is the seven-year rule, which applies to most gifts made to individuals known as Potentially Exempt Transfers or PETs.
If you gift an asset to an individual and live for at least seven years after the date of the gift, the gift becomes completely exempt from IHT and is not included in the value of your estate.
If you die within seven years of making a PET, the gift “fails” and its value is brought back into your estate for IHT calculations.
It will first use up your available Nil-Rate Band (NRB), which is currently £325,000.
If the value of the gifts exceeds your available NRB, the excess is subject to IHT, but the tax due may be reduced by Taper Relief.
Taper Relief on gifts
Taper Relief reduces the IHT rate on the portion of the gift that is above the Nil-Rate Band, based on how long before death the gift was made.
| Years between gift and death | IHT rate on the gift (above NRB) |
| Less than three | 40 per cent |
| Three to four | 32 per cent |
| Four to five | 24 per cent |
| Five to six | 16 per cent |
| Six to seven | 8 per cent |
| Seven or more | 0 per cent (Exempt) |
Inheritance Tax is not the only consideration, as gifting assets other than cash may trigger other taxes.
Capital Gains Tax
If you gift an asset that has increased in value, like a second property or shares, you may be liable for Capital Gains Tax (CGT), as the gift is generally treated as a ‘disposal’ at market value.
This is not the case for gifting cash or your main private residence, which is usually exempt from CGT via Private Residence Relief (PRR).
Stamp Duty Land Tax
If you gift property, the recipient may have to pay Stamp Duty Land Tax (SDLT) on the value of any outstanding mortgage they take over.
Gifts with Reservation of Benefit
If you give away an asset but continue to benefit from it, it will still be considered part of your estate when you die, regardless of how long ago you made the gift.
For instance, if you were to gift your house to your child but continue to live there rent-free, it would be considered a Gift with Reservation of Benefit (GWROB).
To prevent this, you would generally need to either move out or pay the new owner a full market rent.
Chargeable lifetime transfer
While gifts to an individual are PETs, gifts into most types of trusts, like discretionary trusts, are Chargeable Lifetime Transfers (CLTs).
A CLT is immediately chargeable to IHT at a rate of 20 per cent on any value above the available NRB.
If you die within seven years, there may be an additional charge to bring the rate up to 40 per cent, with Taper Relief potentially applying to reduce this.
From the above examples of pitfalls you can encounter gifting other than cash, we can help you understand the intricacies of IHT and succession planning so that you can determine the best course of action for you and your family.
For professional Inheritance Tax support, be sure to speak to our team today.
