What is a Lifetime Gift?

Emily Bloomfield, part of the Wills, Powers and Trusts team, answer the question, what is a lifetime gift, and takes a look at what types of gifts you can give.

Most people assume that you can give away money or property and it will immediately be discounted from the value of your estate if you were to die.  This is not the case with lifetime gifts and it is important to know the rules before you make a gift. 

A lifetime gift occurs when you give something away to another person whilst you are still alive. A gift can be a transfer of anything that has value such as a personal item, property or money. It can also include selling something for less than market value.

People give away assets for all sorts of reasons. Some give away assets to reduce their estate for Inheritance Tax purposes or to help family members, for example, gifted deposits to children to help them onto the property ladder. Gifts of land and forgiveness of debt or money owed must be formally recorded by a deed (a legal document). Even when a formal document is not required, it is best practice to document and date your gift.

When you die, the value of your estate is assessed for Inheritance Tax purposes and sometimes, the gifts that you have made can still make up part of the value of your estate and be taxed.

There are three main types of lifetime gifts. They are Exempt Transfers, Chargeable Transfers and Potentially Exempt Transfers (PETs). It is important to know the difference when making gifts.

Exempt Transfers

Exempt transfers occur when you transfer assets to an ‘exempt beneficiary’. Exempt beneficiaries include your spouse or civil partner, charities and some political parties.

The value of exempt gifts will fall out of your estate immediately upon making the gift and you do not have to survive the gift for any period of time. They can also be for an unlimited amount.

Potentially Exempt Transfers (PETs)

A PET is a gift of an asset that is only ‘potentially exempt’ from Inheritance Tax. It is only potentially exempt because it is possible it could be subject to Inheritance Tax depending on how long you survive from the date of the gift and whether you retain any benefit in the asset after it has been gifted. You will have to survive the date of the gift by seven years. If you die before the end of the seven years, the value of the gift will be taken into account in your estate when it is assessed for Inheritance Tax purposes. It can therefore be taxed and the amount of tax depends on the number of years you survived after making the gift. This is known as the seven-year rule.

There is another type of gift which is a type of PET. This is known as a Gift with Reservation of Benefit (GROB). A GROB occurs when a gift of an asset is made but you retain some benefit in the asset that has been gifted. This can occur when someone gifts their home to their children but continues to live in the property without paying market rent. The value of the asset that you have gifted will be taken into account when your estate is assessed for Inheritance Tax purposes when you die.

With GROBs, the seven-year rule does not begin to run until the ‘reservation’ has ceased. For example, you gift your home to your children but continue to live there rent free for 25 years until you die. Even though you have survived seven years, you still retain the benefit in the property by living in it rent free. The value of the property at the date of your death, and not the date of the gift will be taken into account for Inheritance Tax purposes. If you moved out of the property after 12 years, then the GROB would cease and the seven years would then begin to run.

Chargeable Transfers

A chargeable transfer is a gift that is neither exempt nor a potentially exempt transfer. Chargeable transfers will be immediately chargeable to Inheritance Tax when you make a lifetime gift. These can include gifts to certain types of trusts or gifts to companies. The Inheritance Tax rate for lifetime chargeable transfers is 20%.

When making chargeable and potentially exempt gifts it is important to take advice as gifts within 7 years of each other can inadvertently increase the seven year rule to fourteen years.

Lifetime gifts: allowances and exemptions

There are various exemptions and allowances that can be claimed to make the most tax efficient gifts. Some of these exemptions and allowances are discussed below.

Exempt gifts are not included within an estate and fall out of account immediately on being made; there is no need for the donor of the gift to survive by seven years.

• Exempt gifts to spouses, charities and some political parties (as discussed above).
• Annual Exemption. Each person has an annual gifting allowance of £3,000 per tax year. You can give away £3,000 without having to survive 7 years for the gift to drop out of account for Inheritance Tax purposes. Additionally, this allowance can be carried over once into the next tax year if unused.
• Weddings and Civil Partnership Exemption. There are also exemptions for weddings or civil partnerships which can be used on top of your annual allowance. You can give the following each tax year to someone who is getting married or entering into a civil partnership:
  • £5,000 to your child
  • £2,500 to your grandchild or great grandchild
  • £1,000 to any other person
• Small Gift Exemption. There is also a small gift allowance which means that you can give as many gifts as you like up to £250 per person each tax year. However, you cannot use the small gift allowance and annual exemption on a gift to the same person.
• Gifts out of income exemption. A gift can be exempt from Inheritance Tax if it is part of your normal expenditure, it is made out of income (such as salary, pensions, rental income or dividends) and it leaves you with sufficient income to maintain your normal standard of living.

If you need any advice regarding lifetime gifts, or estate planning, please contact our private client team.