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What is Lifetime Gifting?

May 23, 2024 | Financial Planning, SJB Global

What is Lifetime Gifting?

May 23, 2024 | Financial Planning, SJB Global

Estate planning isn’t just about drafting a will or setting up trusts; it’s an art that involves strategic planning and foresight, more so when one needs to handle potential inheritance tax (IHT) liabilities.

One of the most effective tools at your disposal is lifetime gifting. This strategy can not only ensure your assets are passed on according to your wishes but can also significantly reduce the tax burden on your estate.

In this guide, we’ll explore the ins and outs of lifetime gifting, from potentially exempt transfers (PETs) to various exemptions that can benefit your estate right away.

Understanding Lifetime Gifting

At its core, lifetime gifting is the process of transferring assets to others during your lifetime, rather than waiting to pass those assets on after your death. This proactive approach has several advantages, chief among them the potential to reduce your IHT liability.

But to navigate these waters successfully, you need to understand the different types of gifts and how they are treated for tax purposes.

Potentially Exempt Transfers (PETs)

A potentially exempt transfer is any gift made to an individual or into a trust that doesn’t immediately incur IHT.

The catch?

If you pass away within seven years of making the gift, it could be subject to IHT. The tax rate on PETs decreases on a sliding scale, known as taper relief, which works like this:

  • 0–3 years: 100%
  • 3–4 years: 80%
  • 4–5 years: 60%
  • 5–6 years: 40%
  • 6–7 years: 20%

After seven years, the gift generally falls outside of your estate for IHT purposes, making PETs a strategic option for early estate planning.

Chargeable Lifetime Transfers (CLTs)

CLTs primarily involve gifts into certain types of trusts. Unlike PETs, CLTs can trigger an immediate IHT charge if they exceed the nil-rate band (currently £325,000). However, like PETs, if you survive for seven years after making the gift, it’s removed from your estate for IHT purposes.

Exemptions and Allowances

Not all gifts will potentially land your estate with a tax bill. Some exemptions allow you to make gifts that are immediately outside of your estate for IHT purposes:

  • Annual Exemption: You can give away £3,000 per year without it being added to the value of your estate. Missed last year’s allowance? You can carry it forward one year, allowing a £6,000 gift without incurring IHT.
  • Small Gifts: You can make as many gifts of up to £250 per person as you like each tax year, provided you haven’t used another exemption on the same person.
  • Gifts Out of Income: Regular gifts made out of your income that don’t affect your standard of living can also be exempt from IHT.
  • Wedding or Civil Partnership Gifts: Parents can gift £5,000, grandparents £2,500, and anyone else £1,000 to the couple without it being added to the estate for IHT purposes.
  • Gifts for Maintenance: Payments to help with another person’s living costs, like an elderly relative or a child under 18, are exempt.
  • Charitable Gifts: Donations to charity are free of IHT, a win-win for both your estate and the charity.
  • Political and National Benefit Gifts: Contributions to political parties and certain organizations for the national benefit are also exempt.
Strategic Considerations

When incorporating lifetime gifting into your estate planning, timing and documentation are crucial. Keep detailed records of all gifts, including the date, value, and recipient, as well as any exemptions you’re claiming. This documentation will be invaluable for your executors and for HMRC if your estate is scrutinized.

Also, consider the impact of your gifts on your lifestyle. While gifting can reduce your IHT liability, it’s important not to give away so much that it compromises your own financial security.

Conclusion

Lifetime gifting is a potent strategy in estate planning, allowing you to pass on wealth to your loved ones in a tax-efficient manner. By understanding the rules around PETs, CLTs, and the various exemptions available, you can make informed decisions that benefit your estate and your heirs.

Remember, the key to successful estate planning is not just in knowing these strategies but in applying them thoughtfully and with foresight. With careful planning, you can ensure that your legacy is preserved and passed on according to your wishes, with as little loss to taxation as possible.

This communication is for informational purposes only based on our understanding of current legislation and practices which are subject to change and are not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.

 

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By scheduling an appointment with an adviser they will reach out to you at your requested time. 
Personal advice, whenever it suits you.