Can I Make Lifetime Gifts To Reduce Inheritance Tax (IHT)?

PETs are ‘potentially exempt’ from IHT as they will drop out of an individual’s estate (and are therefore tax-free) provided the individual survives the gift by seven years.

Gifts into certain types of trusts are treated differently to PETs and could be subject to IHT immediately. 

Everyone has an IHT free allowance of £325,000 (called the ‘nil rate band’ (NRB)). This means that everyone can give away up to £325,000 IHT free on their death, or in the seven years before their death.

PETs made in the seven years before death can reduce an individual’s NRB.

For example, if you gifted £50,000 to your child and then died three years later, you would only be able to pass on £275,000 tax-free on your death. However, if you gifted £50,000 to your child and then died eight years later, you would be able to pass on £325,000 tax-free on your death.

Any gifts made in the seven years before death that exceed the value of £325,000 would eat up the entirety of the NRB and any gifts made above this value could be liable to an IHT charge up to the rate of 40%.

Whilst gifting is a useful tool to reduce the value of your estate for IHT purposes, you should be mindful of the following:  

7-year rule

You should always be mindful of the seven-year rule when making a lifetime gift. If you die within seven years of making the gift, this will become chargeable and may be liable for IHT.

Financial security and deprivation of assets

You should always ensure that you have sufficient funds to live off to maintain your current standard of living. It is important not to deprive yourself of assets, and you should ensure that you have adequate funds for future needs.

You should not deliberately deprive yourself of assets to evade care home fees. If the local authority considers that you have made lifetime gifts as a guise to evade care fees, the gifts may be investigated in the future.

Achieving equality between family members

If you have made lifetime gifts to certain family members during your lifetime but not to others, you may wish to achieve equality by equalising gifts in your Will.    

Record keeping

You must keep a record any gifts made during your lifetime, including the amount gifted, when and to whom. This will provide valuable assistance for your executors who must determine your IHT position on your death.

Gifts with a reservation of benefit

If you retain a benefit in a gift (e.g. if you gift a property to your child but continue to live in the property rent-free), the gift will be ineffective for IHT purposes, and it will remain within your estate.