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Inheritance Tax Planning and Lifetime Gifts

Inheritance Tax Planning and Lifetime Gifts

By: Abigail Whelan

Tags: Tax Planning, Wills And Probate, Private Client

Depending on how much you have to leave, your estate may be liable to pay Inheritance Tax when you die, and you may want to think about how you can reduce that impact.If you are concerned about the impact of Inheritance Tax on your estate, lifetime gifting - giving some of your assets away while you are alive - can be a useful tool to mitigate this. If you are in good health and expect to survive for at least 7 years from the date of the gift then, in theory, you can give away as much of your estate as you please for Inheritance Tax purposes.

Even if there is a possibility that you may not survive for 7 years, there are various exemptions that you can use to reduce inheritance tax, in relation to lifetime gifting. For example, everybody has an Annual Exemption of £3,000 which will be free from Inheritance Tax, allowing you to give away that amount every year, if you want, without it incurring any tax when you do pass on. 

However, there circumstances where lifetime gifting can give rise to problems:-

One example of this is where an individual (A) decides to gift their home to another individual (B) but  then continues to live in the property.

'A' might think that by doing this the property will not fall within their estate for Inheritance Tax purposes. However, if 'A' continues to live in the property until they pass away, there’s a risk that HMRC will treat this gift as a Gift with Reservation of Benefit (a GROB).  This means that the property will fall within A’s Estate on their death and will be taxed as such. In other words, because 'A' continues to have use of the property, it's treated as if it still belongs to them, for tax purposes.

There are ways to prevent a gift such as this being treated as a GROB but the law in this area can be complex, so it is always best to seek professional advice.

Another situation where problems can arise is in relation to funding for Care Fees. Taking a similar scenario to the one used above, 'A 'might decide to sell their home and move in with 'B', giving the proceeds of sale to 'B' as a gift. If 'A' subsequently becomes ill  needs to go into a nursing or care home, the Local Authority may treat this gift as a Deliberate Deprivation of Assets. This is most likely if,  at the time the gift was made, if it was reasonably foreseeable that A might have need to be looked after in a Care home or nursing home.  In this situation, the Local Authority will treat 'A' as if they still had the money or property which they have given to 'B',  when valuing their Estate for the purpose of working out what they have to pay to fund their care.

Please be aware that it is not only gifts that may be caught by the Deliberate Deprivation rules but also other transactions, such as selling a property or other assets  for less than full market value,  may also be regarded as deliberate deprivation if the local authority believes that your intention was to deprive yourself of assets in order to qualify for funding for care fees.

The law relating to lifetime gifting can be complex and so it’s always best to seek professional advice. If you are thinking about carrying out some lifetime tax planning, why not come and see us to talk things through and ensure peace of mind for your family’s future.  

To book an appointment, contact our Private Client department 



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