Minimising inheritance tax with lifetime gifts

Many people do not consider themselves to be wealthy enough to be affected by inheritance tax and unfortunately get caught out by life’s final taxation. With over 28,000 estates liable for inheritance tax in 2016-17, it’s worth looking at ways to legally minimise the amount of inheritance tax your beneficiaries are likely to have to pay when you die.

With the continued rise in house prices over recent years, many people have unwittingly found themselves in inheritance tax territory. The basic premise of inheritance tax is that the tax is paid at 40% on any assets you leave which are worth more than a total of £325k. It should be pointed out however that there is no inheritance tax to pay if the value of your estate is below £325,000. This is of course subject to assets given away during your lifetime that are reconsidered upon death, and other interests which can lumped into your death estate for tax purposes, such as rights to reside. If you leave everything above the £325,000 threshold to your spouse, civil partner, a charity, or a community amateur sports club, then no tax may be payable at this point.

Despite this, as mentioned above – in 2016-17 over 28,000 estates were liable for inheritance tax, a 15% increase on the previous year.

So, as nobody likes to give more to the tax man than they absolutely have to, what can you do to legally minimise the amount of inheritance tax you need to pay?
The starting point would be to seek professional and specialist advise on whether your estate is currently taxable, or if it may become taxable. Then the next step is to be advised on what lifetime planning may be undertaking to minimise any such liability. Such planning is subjective to your own personal assets and family circumstances, but one method may be to make lifetime gifts.

Lucy Duffin, a solicitor from our Wills, Trusts and Probate team, discusses the benefits of lifetime gifts.

What is a lifetime gift and how can it help minimise inheritance tax?
A lifetime gift is a gift of cash or assets that you choose to give during your lifetime, rather than on your death in your will. Lifetime gifts are treated differently in terms of tax to gifts given in a will. There are strict rules which apply, but if adhered to correctly, lifetime gifts can be far more tax efficient. A lifetime gift can be made outright, or rather into a lifetime trust. You may wish to carry out a mixture of the two by say giving children cash sums outright and then setting up a trust for the future benefit of your grandchildren.

The main stipulation for the gift not to incur any inheritance tax is that you live for seven years after making the gift. Should you die before this time has elapsed, the recipient will be liable for tax on the gift at 40%.

However, some gifts may already be exempt from inheritance tax and specialist advice will be required in identifying what is appropriate to give away, and also the requirements necessary to fulfil in order to ensure that the gift is not subject to inheritance tax.

As well as using them for efficient tax planning, people choose to give gifts during their lifetime for a number of different reasons. Perhaps helping their children to buy their first home or a car or maybe to contribute towards care home fees for elderly parents. Whatever the money is gifted for, if done correctly and in a timely manner, a lifetime gift can reduce the amount of inheritance tax due on your death.

What is the seven-year rule regarding inheritance tax?
If you die within seven years, the gift may be subject to inheritance tax at an eye-watering 40%. This is why forward planning is so important when it comes to making lifetime gifts. HMRC have wisely put rules in place to prevent people from avoiding an inheritance tax bill by simply giving all their money away on their deathbed! Some gifts will even be tax-free from the time they are made, as mentioned above. For example, gifts between married couples or civil partners, or the first £3,000 gifted in each tax year.  It is possible however for the recipient of the lifetime gift to take out life insurance which will pay the inheritance tax bill. This is also an important consideration.

5 things to consider when making a lifetime gift

Although lifetime gifts can provide significant benefits, there are important implications which should be considered so that you make your decision with your eyes open.

  1. Candidly, can you afford it?
    If you make a gift, are you sure that you still have enough resources at your disposal to pay for your day to day expenses as well any unforeseen costs in the future such as health care / care home fees? There may be other lifetime planning options which are more suitable for your situation and your chosen recipient’s circumstances.
  2. There’s no going back/ relationships may change
    You can’t get the gift back once it has been given. If you change your mind, there’s nothing you can do about it, this is a permanent decision. Don’t give a gift thinking that you trust that the person will return it to you should your circumstances change. Relationships can sometimes sour over time and promises made to return gifts may not be kept.
  3. Impact of limiting your choices
    Reducing your disposable wealth will limit the choices you can make. Perhaps an obvious statement but one which should be thought through and considered very carefully given that this is a permanent decision. It may also be looked at by the Local Authority on the basis that you have deprived yourself of assets to avoid care fees.
  4. Capital Gains Tax
    Beware unexpected additional costs in the shape of capital gains tax. If the lifetime gift is invested by the recipient and they make a profit from it for example, you may become liable for capital gains tax. This has happened frequently when money has been invested in second homes which have subsequently significantly increased in value.
  5. Does the lifetime gift change the provisions within my will?
    As with all lifetime planning, it is crucial that this does not conflict with your will planning. If you give away assets specifically gifted in your will then that beneficiary may lose out. If the gift becomes subject to inheritance tax upon your death then the recipient is usually personally liable and so may end up with less than you intended. If the gifts fail and use up some of your allowances then your will beneficiaries may end up bearing more tax than you intended. If you do not make all the gifts intended during your lifetime,  has your will got enough flexibility to cope with equalising your beneficiaries upon death?

Get in touch
If you would like to discuss making a lifetime gift, our experienced team would be delighted to help.  Just call us on 01872 241408 or email We would stress that advice surrounding such a decision is essential, as the rules on lifetime gifts can be complex and have knock-on effects which we can advise you on before you have committed to a gift. There may also be other estate planning options more suitable to your situation.