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Wills, Probate & Trust

How to make giving your child a deposit inheritance tax efficient – lifetime giving explained

Lifetime giving explained

Wednesday, October 16, 2019

Lifetime giving done well can be an ideal way of passing on wealth and seeing the benefit, whilst also saving tax on your death.

The problem is that the tax rules are both unnecessarily complicated and often misunderstood.

Although it is always worth taking specialist tax advice for complex tax planning, e.g. creating and transferring funds into trust, or when dealing with high-value gifts, this should not be necessary for those making regular small gifts or one-off contributions for, for example, their child’s house deposit or a car.

So how do the inheritance tax (IHT) rules for lifetime gifts work?

Take Samantha. Samantha wants to give her son Philip £15,000 from her savings to be used as a deposit on a house. She has not made any gifts over £250 (this is the small gifts allowance) to anyone in the last 3 years and has not created any trusts.

The first thing that Samantha needs to know is that her gift will not create any immediate IHT liability. If any IHT were to arise from the gift, it would be on her death.

As the gift is over £250 she cannot use her small gift allowance.

Samantha can, however, use her annual allowance of £3,000. This amount is exempt straight away. The value of the gift for IHT purposes is therefore immediately reduced to £12,000.

As Samantha did not use her annual allowance in the last tax year either, she can carry this forward, thus reducing the taxable value of the gift to £9,000. The annual allowance can only be carried forward for 1 year, so even though Samantha has not used any of her annual allowance in the last 3 years, she can only apply her allowance this year and last year to the gift. The earlier unused allowance has been lost.

If Samantha had a good income which was significantly higher than her expenditure then the taxable value of the gift might possibly be further reduced by claiming it as a gift out of income. This can, however, be complicated and advance planning is required. If you are giving enough to be contemplating using this rule, seeking professional advice before making the gift to help you work out and evidence your surplus income is a good investment.

Assuming that Samantha does not have surplus income and is making the gift from her existing savings, the remaining £9,000 will be classed as a ‘potentially exempt transfer’ (PET).

This means that on making the gift a 7-year clock starts ticking. If Samantha survives the full 7 years then the full £9,000 becomes exempt.

If she were to die within 7 years then the £9000 PET would fail and the £9,000 would be added back to the value of her assets for IHT purposes (this would not affect Philip’s entitlement to the money in any way). The failed PET would use the 1st part of Samantha’s ‘nil rate band’. This is the individual allowance which is taxed at 0% on death. The current nil rate band is £325,000.

In our example, as long as Samantha’s assets (after deducting liabilities) are less than £316,000 at her death, there will be no tax to pay. This is because even taking the £9,000 into account she is still under the £325,000 nil rate band.

If Samantha’s assets are over £316,000 then, depending on the contents of her Will and other inheritance tax reliefs and exemptions available, there may be some tax to on her death.

In either case, by understanding the basic rules, Samantha is much better able to assess the potential implications on her death, the records it would be useful to keep, and whether she would benefit from professional advice.

Taking professional advice need not be expensive. At Samuel Phillips Law, we consider lifetime giving with our clients as part of the process of making or reviewing their Will. In many cases, we are able to recommend simple cost-effective steps to ensure additional reliefs and exemptions are available. If necessary we can also help identify a suitable specialist non-legal adviser who can explore other tax planning options. Taking these steps now can save significant time and cost later down the line and give peace of mind.

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