Lifetime gifts could be the perfect way to spread the love this Valentine's Day. There are several advantages to making lifetime gifts. However, there are also various rules, exemptions, and tax implications you should be aware of when making lifetime gifts. So, if you are Clueless about lifetime gifts but think it’s About Time you made some, you may find this romcom-themed article helpful!
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Table of Contents
- What is a lifetime gift?
- How does tax on lifetime gifts work?
- What is the 7 year rule for gifts?
- Gift with reservation of benefit (GROB)
- What is the Annual Exemption for lifetime gifts?
- Small gift exemption
- Are lifetime gifts to charity exempt from Inheritance Tax?
- Wedding Gift Allowance
- Gifts between spouses or civil partners
- How to make a lifetime gift
- How can I keep track of lifetime gifts?
- Can you challenge a lifetime gift
- What are the advantages of lifetime gifts?
- What are the disadvantages of lifetime gifts?
- Do I need legal advice to make lifetime gifts?
- Get in Touch
What is a lifetime gift?
Something’s gotta give
A Lifetime Gift is a cash gift or asset gifted by someone (‘the donor’) in their lifetime, rather than after their death.
Lifetime gifts can include:
- Property and land
Lifetime gifts also extend to selling items or property for less than their market value.
For example, William’s flat in Notting Hill is valued at £300,000. He sells it to Anna for £250,000. In this instance, William has made a gift of £50,000 to Anna.
How does tax on lifetime gifts work?
Inheritance Tax may be payable on certain lifetime gifts after you pass away. If the gift does not meet the exemption criteria, then it must be included as part of your estate. This could increase the value of your estate and the amount of inheritance tax owed.
The following factors will determine whether a lifetime gift is exempt from inheritance tax:
- When the gift was made – crucially if the gift was made after 7 years before the deceased passed away.
- Who the recipient of the gift was – such as a spouse/civil partner, relative, friend, charity
- The total value of the gift and the size of your estate.
What is the 7 year rule for gifts?
The Seven Year Itch
As long as you live for 7 years after the gift was given, you can make gifts of unlimited value each tax year. If you survive for a period of 7 years following the gift, the gift may be exempt from inheritance tax.
There are tricky rules regarding gifts, in some circumstances HMRC can look back over a 14-year period.
However, if you do not survive 7 years following that gift, the value of the gift will form part of your estate when you die. This could potentially be liable to inheritance tax. For more information visit: https://www.gov.uk/inheritance-tax/gifts.
Gift with reservation of benefit (GROB)
Gifts with benefits
A Gift with Reservation of Benefit (GROB) is a gift that is not fully given away because the person making the gift keeps some benefit for themselves.
For example, Dylan gifts his house to Jamie, but Dylan continues to live in the house rent free, keeping the benefit of the house. You can find out more about similar scenarios by reading our article here.
Another example is that Dylan gifts his most expensive painting to Jamie, but the painting continues to hang in his apartment, where he gets the benefit of it.
In these instances, these gifts would still be considered part of Dylan’s estate for inheritance tax purposes.
What is the Annual Exemption for lifetime gifts?
I Love You, 3,000.
Everyone has a tax-free allowance (known as your annual exemption) of £3,000 worth of gifts per tax year (6 April to 5 April).
You may choose to gift cash or an asset worth £3,000 to one person. Alternatively, you may make several gifts to different loved ones, totalling £3,000 overall.
For example, in one tax year, Holly gifts her daughter a £2,500 Tiffany’s ring. She then gifts her son a £500 Tiffany’s telephone dialler. In this scenario, Holly has split her annual exemption of £3,000 between her two children.
If you have not given away the full £3,000 in a tax year, you may carry this over for one further tax year.
Small gift exemption
No Strings Attached
You may like to treat your loved ones to small gifts throughout the year. These may be Valentine’s, birthday or Christmas presents, or just because we love them! You can give as many gifts of up to £250.00 per person as you want during the tax year, but not to the same person receiving part of the £3,000 annual exemption.
Are lifetime gifts to charity exempt from Inheritance Tax?
Yes, lifetime gifts to a UK charity are exempt from Inheritance Tax (IHT). So, if you would like to make a gift to a charity close to your heart, this will be tax free.
Wedding Gift Allowance
The Wedding Planner
Family and friends can make a wedding gift to loved ones who are getting married.
Whether you want to help the bride buy 27 Dresses, or contribute towards a Big Fat Greek Wedding, your gift can be included in your tax-free wedding exemption.
The different wedding gift exemptions are:
- You may give up to £5,000 as a wedding gift to a child – perfect if you are the mother or Father of the Bride!
- You may give up to £2,500 as a wedding gift to a grandchild or great-grandchild.
- You may give up to £1,000 as a wedding gift to any other friend or relative – this could be a great gift for a Best Friend’s Wedding!
You can combine your Wedding allowance with your annual exemption of £3,000, but not your small gifts allowance. This means that if you do not use your annual exemption on anyone else in that tax year, you could gift your child up to £8,000 for their wedding.
Gifts between spouses or civil partners
Any money or assets gifted to your spouse or civil partner are tax free!
How to make a lifetime gift
Just go with it
As long as your gift meets all the criteria and you have considered the implications, there is no specific “How to make a lifetime gift in 10 days” process.
However, we recommend that any financial gift is made by cheque or bank transfer, so there is a clear record of the transaction. Giving a cash gift may be harder to keep track of if there are any queries or disputes in the future.
How can I keep track of lifetime gifts?
To all the gifts I’ve left before
It is important to keep a record, such as a Notebook, of all the gifts you have made, including the date, type of gift, amount/value, recipient and purpose (for example, a wedding gift). This will help you to ensure you do not exceed your limit for each tax year. This record will also help your executors determine whether these gifts should be included in your estate after you pass away.
You should also make it clear whether these were intended as gifts or loans. This can help prevent any disputes in the future.
Can you challenge a lifetime gift
“I’ll have what she’s having”
Loved ones may challenge the purpose or intention of a lifetime gift. In particularly complex circumstances, this could result in family disputes.
Lifetime gifts can be challenged for several reasons:
- The donor did not have mental capacity when making the gift.
- The donor was coerced (forced or threatened) into making the gift.
Challenging the legitimacy and intentions of a lifetime gift can be difficult, particularly if the loved one has since lost capacity or passed away. You should seek legal advice if you are concerned that someone made a lifetime gift based on one of these reasons.
What are the advantages of lifetime gifts?
As good as it gets
Lifetime gifting is a lovely way to help our loved ones. There are also several tax advantages to making lifetime gifts.
- Giving away money or assets within your allowances and exemptions can help to reduce taxes upon your death. This is because you have reduced the size of your estate.
- You get the pleasure of seeing your loved ones enjoying the gift during your own lifetime.
What are the disadvantages of lifetime gifts?
10 Things I Hate About Lifetime Gifts
- If you have made lifetime gifts to people other than the beneficiaries of your Will, this reduces the amount of inheritance that your beneficiaries will receive.
- You may not want to give away too much in your lifetime. You may suddenly require some financial security, or use of the item you have given (such as a car). You must be sure you can afford to live without the gift.
- It can be confusing and difficult to keep track of your exemptions and allowances. So, there is the risk you may exceed these.
- If you have made a significant number of gifts to reduce the value of your estate, but unexpectedly pass away within seven years of this, your estate may not contain the funds to pay the Inheritance Tax on the estate, when the value of these gifts is added to the total. Your beneficiaries or executors may then be responsible for the shortfall.
- There is the possibility that a capital gains liability could be created for you or the recipient. For example, if you are gifting assets other than cash, such as a property or valuable artwork.
Family and Relationships Considerations
- There can be disputes about whether this was a gift or a loan if it is unclear upon your death.
- There can be family fall outs regarding any gifts which have been made. For example, if some have been given more money than others.
- You may feel forced or threatened to make a gift to someone, if you have done so once before. You may not want it to become an expectation or regular occurrence.
- Gifting large amounts of money to children or young people could be unwise. They may not yet have the maturity to use it sensibly.
- Your relationship could break down with someone you have gifted a large amount of money to. This can be disadvantageous if it is not by way of a loan.
Do I need legal advice to make lifetime gifts?
Set it Up
We recommend you seek legal advice if you wish to make large lifetime gifts. You should also seek or are unsure about your exemptions and tax liabilities.
At Crane & Staples, we love helping our clients with estate and tax planning and are passionate about helping them make the best choices for them and their families.
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