Making lifetime gifts to reduce the value of your estate on death for inheritance tax purposes is a useful way to preserve wealth down the generations.
HMRC allows a variety of exemptions including an annual allowance of £3,000, gifts worth less than £250, wedding gifts, gifts to help with living costs, and gifts from surplus income. Gifts between spouses, gifts to charity and some gifts to political parties are also exempt. Any gifts that do not qualify for these exemptions are known as Potentially Exempt Transfers (PETs) and will affect the donor’s nil-rate-band if the donor dies within seven years. If the value of any PETs made in the last seven years of life is above the value of the nil-rate-band, then the recipient is liable for the inheritance tax due on the gift. It is therefore important to take tax and legal advice before making gifts.
When you die, the gifts that you made during your lifetime can be called into account on distribution of the estate by including a ‘hotchpot’ clause in your will. This clause will direct the executors, before distributing the estate, to take into account any gifts you made during your lifetime (from the date of the will or a specified earlier date) that are worth over a specified amount. This can often cause arguments between beneficiaries, however, particularly if you were not transparent about gifts during your lifetime.
Gifts of personal possessions can also cause conflict if you have promised someone that they will inherit certain items on death, but then give them away during your lifetime. If these items are specifically mentioned in your will, then these gifts will fail on death.
It is therefore vitally important that if you are considering making lifetime gifts, you should properly document who is to get what, preferably by deed, sign it, and get it witnessed to avoid any confusion on your death. At the very least, you should keep a record of gifts that you have made during your lifetime and sign the record. It is good practice to keep any documents about lifetime gifts with your will, so if there are any challenges, the executors will have all the information they need. It will also assist with completing the account for inheritance tax.
How can gifts be challenged?
A lifetime gift can be set aside on your death if it can be shown that you were unduly influenced into making the gift, or that you lacked the mental capacity to do so.
There are considered to be two types of undue influence:
- Actual undue influence, i.e. overt acts of improper pressure or coercion.
- Presumed undue influence – this arises from the relationship of trust and confidence between the donor and the recipient.
Lawyers are seeing an increasing number of challenges to gifts on the basis of undue influence, so again, it is important to clearly document your intentions when making gifts to ensure they are not challenged on your death.
If you are concerned about the tax or other implications of making lifetime gifts, you should speak to a qualified practitioner, who will be able to provide you with advice and recommendations based on your specific circumstance.
Andrea Jones TEP, senior associate, and Paula Myers, Partner and National Head of Will, Trust and Estate Disputes at Irwin Mitchell Private Wealth, Leeds.