Bharbhage Singh

Senior Legal Assistant

Wills, Trusts and Probate


Lifetime gifts and inheritance tax planning

Bharbhage Singh

Lifetime gifts can be used as an effective way of reducing inheritance tax liability


With the new tax year a little under a month away now, it might be a good time to give some thought to inheritance tax planning. The benefits of using lifetime gifts are often overlooked, but properly thought out they can be an effective way of reducing the inheritance tax liability that might be payable after death.

Before any real consideration can be given to the benefits of lifetime gifts certain fundamental principles about inheritance tax need to be understood. Inheritance tax is in essence a simple tax in that it is charged at a flat rate of 40% and is only charged on assets in excess of £325,000 (known as the ‘nil rate band’).


Certain beneficiaries do not pay inheritance tax (most commonly a surviving spouse and charities), and additional relief is also available on certain assets, for example the family home as well as certain business and agricultural assets.

 
For inheritance tax purposes the three most common types of gift to bear in mind are: 

  • ‘small gifts’  - being gifts not exceeding £250
  • ‘annually exempt gifts’ – being gifts made in a particular tax year up to the value of £3,000, and
  • ‘Potentially Exempt Transfers’ (PET’s) – being gifts of more than £3,000 which might be exempt from inheritance tax providing you survive 7 years from the making of the gift.

 

The end of one tax year and the beginning of another can be a good time to review your estate and take advantage, in particular, of the annually exempt gift allowance. The ability to carry forward any unused allowance from the previous tax year, coupled with the opportunity to straddle two tax years, will result in gifts totalling £9,000 being made in quick succession with a potential tax saving of £3,600.

 
As always with lifetime inheritance tax planning, careful consideration needs to be given to the wider aspects of making gifts before any action is taken.

 
If you are interested in any of the topics raised in this article, or for further information, please contact Bharbhage. Alternatively, you can to speak to one of the team on 0115 9888 777.

 

 

 

 

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