Will I have to pay Inheritance Tax on gifts & money given in my lifetime?
Gifting can be very generous and is sometimes seen as a way to reduce the amount of money in your Estate so that you don’t have to pay Inheritance Tax when you pass BUT…
Did you know that YOU MAY HAVE TO PAY INHERITANCE TAX on any gifts made in the 7 years prior to your death?
You DO NOT have to pay Inheritance Tax on the following gifts:
up to £3,000 given in any one tax year
up to £1,000 for wedding gift (£5,000 to a child or £2,500 to a grandchild)
payments to help with living costs (of someone under 18 or elderly relative)
gifts to charities or political parties
gifts up to £250 (although this cannot be used in conjunction with the gift of £3,000 mentioned above)
gifts out of surplus income* (word of warning to come on this one!)
Gifts out of Income
Giving someone a gift of money from your surplus income is a way to reduce your own estate and therefore potentially reduce your Inheritance Tax liability.
HOWEVER (here is your word of warning that we mentioned above!)…
You must be able to demonstrate that it is ‘surplus income’ and upon your death your Executors will have to complete a separate income and expenditure form within your Inheritance Tax Return to prove that this was surplus income in order that it is exempt from Inheritance Tax.
Potentially Exempt Transfers
We mentioned at the outset that you may have to pay Inheritance Tax on any gifts made in the 7 years prior to your death…
Potentially Exempt Transfers (affectionately known as PETs😉) are gifts given during your lifetime that MAY become exempt from Inheritance Tax IF you survive for SEVEN YEARS after giving the gift (or PET). There will then be NO Inheritance Tax to pay.
However, if you do not survive for 7 years after giving the gift, then Inheritance Tax will be charged at 40% if given within THREE years of your death and this then tapers as follows:
- 32% for gifts given 3-4 years before death;
- 24% for gifts given 4-5 years before death;
- 16% for gifts given 5-6 years before death;
- 8% for gifts given 6-7 years before death.
Gifts with a Reservation of Benefit
Gifts with a Reservation of Benefit may also be referred to as GROBs.
GROBs are gifts that are given but the person that receives the gift does NOT benefit from full enjoyment of the gift immediately.
A common example of this is where parents ‘gift’ or transfer their house to their children (in the hope of saving on Inheritance Tax) but continue to live in the house rent-free.
This is a GROB as the children are not taking full possession of the property and the parents still have a benefit (despite ‘gifting’ the property) and so Inheritance Tax WILL BE PAYABLE upon death.
Hotchpot Rule
The Hotchpot Rule ensures equal distribution of your assets, taking into account any advancements or gifts during your lifetime.
For example, if you have three children and give one of these £50,000 during your lifetime, and want to ensure that this is reduced from any Inheritance that they receive so that equal monies are received by all three children you can include a HOTCHPOT RULE clause within your Will.
In practice, if you had three children and advanced one of those £50,000 during your lifetime, then upon your death there was £850,000 to be split between three children, the £50,000 advanced during your lifetime would be added into the calculation, meaning each child who has received no advancement would receive £300,000 each and the child that had received the £50,000 previously would receive £250,000.
Presumption of Advancement
Presumption of Advancement can seem somewhat archaic but it does still apply today!
Put simply, a LOAN has to be repaid but a GIFT does not, the same applies upon death.
This can be very tricky if there is nothing left, by the deceased, in writing in relation to money given away during their lifetime, that is when the PRESUMPTION OF ADVANCEMENT can come in and cause problems…
PRESUMPTION OF A GIFT occurs on the following:
- money from husband to wife
- money from father to child
- money from man to fiancee
PRESUMPTION OF A GIFT does NOT occur on the following:
- money from wife to husband
- money from mother to child
- money between cohabiting couples
You see why we say this can seem somewhat archaic! We don’t make the law…we just follow it😉
If you would like to have a free chat about Lifetime Gifts or Wills, please contact us on info@TotalLegacyCare.co.uk or 01727 865 121
Leah Waller
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