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One question we often get asked is:  “How can I gift my assets to the next generation efficiently?”

The short answer is there is usually no Inheritance Tax payable on lifetime gifts and certain gifts are exempt.  Note the key words here:  usually and certain!

Other gifts may be taxable immediately (chargeable lifetime transfers) or can become chargeable if you die within 7 years of making the gift.

In other circumstances, it may be necessary to look back up to 14 years before death to assess if a gift has become chargeable.  The order in which lifetime gifts are made can be important, especially if some of those gifts were into a trust.

Chargeable Lifetime Transfers (CLTs)
If you make a gift to a trust, apart from a few exceptions, the gift will be taxable if its value (or the cumulative value of relevant gifts) exceeds the nil rate band (£325,000 per individual, £650,000 for married couples/civil partners).

The effective rate of tax on lifetime chargeable transfers is 20% and is payable by the settlor i.e. the person making the gift.  If you die within 7 years of such a gift, additional tax will become due, but it may be tapered.  The additional tax liability falls on the Trustees.

Potentially Exempt Transfers (PETs)
You can make other gifts in your lifetime of any value and if you survive the making of those gifts by 7 years, they will be exempt.

If the value of lifetime gifts exceeds £325,000 and you die within 7 years, some or all those gifts will become taxable on death. If you survive the making of a gift by at least 3 years, then the tax that is due is tapered.  It is the recipient of the gift(s) who is responsible for paying the tax at this point.

Exempt Gifts
There are several gifts that are exempt immediately and not subject to the 7-year rule.  These are:

Gifts between spouses
These are irrespective of the value, provided the recipient is domiciled in the UK.

Annual Exemption
This is £3,000 each tax year. If you have not used the allowance in the previous tax year, then you can go back one year.  Also remember that this exemption does not apply to each recipient but to you as the donor.

Gifts on Marriage/Civil Ceremony
£5,000 for a child, £2,500 for a grandchild or great grandchild and £1,000 in any other case.

Normal gifts out of income
You must be able to maintain your standard of living and you must not dip into your capital to do so.  It is a good idea to keep a record of such gifts in your lifetime as your executors will have to show to HMRC that these gifts were genuinely made from your income. This means that there must be an intention to continue to make gifts and a pattern of those gifts i.e. every birthday you give away £X.

Payments to help with another person’s living costs
This will usually be by a parent to a child under 18 or to an elderly relative.

Gifts to charities and political parties
Again, these are irrespective of value of the gift.

Small gifts up to £250
You can make as many gifts up to £250 to different people during the tax year.  This cannot be used in conjunction with another exemption

If you have any questions regarding Inheritance Tax or gifts, contact our Tax Consultancy and Wills, Trusts and Probate specialists.