Inheritance Planning - Gifts

Is Your Gift For Free?

Whilst Wills deal with the situation after death, Gifting can reduce the value of your taxable estate during your lifetime.

Most gifts made whilst you are alive can escape Inheritance Tax. The three types of gifting are:

- Exempt Gifts: The main gifts that receive exemption from Inheritance Tax are as follows: to your spouse, annual exemption, small gifts exemption, normal expenditure out of income, gifts in consideration of marriage, gifts to UK registered charities, gifts to the main political parties, gifts for National purposes (e.g. National Trust, museums and galleries).

- Potentially Exempt Gifts: Any gift not covered by the above exemptions will usually be a Potentially Exempt Transfer (PET). These are liable to Inheritance Tax for up to seven years, after which time the gift is fully exempt.

If death occurs within seven years of the gift being made it is likely that the full amount of the gift will be included in considering the value of the deceased estate. However, some gifts can be reduced by Tapering Relief, but this would only be relevant if total gifts exceeded the value of the Nil Rate Band.

- Chargeable Gifts: If a lifetime gift is neither exempt or qualifies as a PET e.g. making gifts into discretionary trusts and gifts involving companies, your gift may be chargeable.

- Other Considerations When Gifting
- Gift With Reservation: To be effective for Inheritance Tax a gift must be outright and unconditional. If you still retain or continue to enjoy a benefit from it, this will be treated as a "Gift With Reservation" and its full value will remain within your estate for the calculation of Inheritance Tax.

- Affordability: Your circumstances will dictate how much you can afford and whether gifts will be made regularly or on a lump sum basis.

- Capital Gains Tax (CGT): Gifts involving current assets may have CGT implications, therefore advice must be taken prior to transferring or encashing any assets or investments.

- Control: You may not want to make outright gifts for fear of losing control. The solution in this instance may be to use a Trust.

For details of the values and specifics of various gift entitlements please speak to one of our advisors.

* Tax information given is based on the 2005/2006 tax year, and may be subject to change in the future. Please note, normally the passing of assets between spouses does not have a liability to inheritance tax.

Partners: Kenneth Harrington & Katherine Harrington
Harrington & Horne Financial Services are Independent Financial Advisers which are directly authorised and regulated by the Financial Services Authority
Head Office: 31 Southdown Avenue, London W7 2AG