In recent years there has been an increase on lifetime gifting. This is not surprising as a large amount of parents are giving their children a financial helping hand to get them on the property ladder. However, many parents often do not know the rules on lifetime gifting.
What is a lifetime gift?
Quite simply, a lifetime gift is a gift given to a beneficiary without any conditions for its return during the donor’s lifetime. Current inheritance tax rules say a donor is entitled to give £3,000 in cash gifts each year exempt from tax. In certain circumstances, there is an allowance for an increased amount of lifetime gifting to a couple who are getting married or entering into a civil partnership, without future inheritance tax consequences.
It is important to note that a cash gift made in a Will is a legacy and is only effective after the donor’s death and therefore is not considered a lifetime gift.
The 7 year rule
If the donor gifts a sum of money larger than the annual allowance of £3,000, the gift might be subject to inheritance tax if the donor dies within 7 years of the date of gift. Cash gifts made more than 7 years prior to death are exempt from inheritance tax and do not use up any allowances.
Proposals for change
A report and recommendations have been made by the Office of Tax Simplification (OTS) and within this consultation, the Law Society highlighted various difficulties and misconceptions arising around lifetime gifts. The OTS came up with some proposals in its recommendations including reducing the 7 years rule to 5 years together with exploring options for simplifying and clarifying the rules on liability for payment on tax on lifetime gifts.
Lifetime gifts are governed by complex and technical rules and it is important that you obtain legal advice if you are thinking of making substantial lifetime gifts including gifts of cash, property, shares etc. If you are considering making a lifetime gift or would like further information about the rules, exemptions and allowances, please contact our friendly Life Planning Team on 01904 624903 who would be happy to help.