A properly structured estate plan involving regular gifts to family, friends and charities can reduce your Inheritance Tax (IHT) bill after you have passed away. Having said that, it is necessary to take proper legal and financial advice before making any significant gifts out of your estate.
This article seeks to consider firstly what counts as a lifetime gift and briefly introduces the things you need to think about before making a gift. We shall then explain why a lifetime gift of your home should be treated with particular caution.
What is a lifetime gift?
Simply put, a lifetime gift is something which you give away to another person whilst you are still alive. It can be a gift of cash, or any other property including (but not limited to):
• Property and land.
• Moveable goods such as vehicles, furniture, artwork, antiques and jewellery.
• Stocks and shares.
Selling goods or property for less than they are worth on the open market also counts as a lifetime gift. Unfortunately, as we shall see, removing an asset from your estate by gifting it does not automatically mean that you won’t pay IHT on it. The rules are more complicated than that, and it’s easy to be caught out.
What determines whether a gift is exempt from IHT?
Timing – please see the explanation of the “seven-year rule” below:
• Who receives the gift? The rules are different if the recipient is your spouse, a charity, or someone else such as a friend, child or more distant relative.
• The value of the gift(s);
• How much your whole estate is worth, and
• Sometimes, the reasons for making the gifts!
The Seven-Year Rule
If you survive the date of the gift by seven years, the value of that gift no longer counts for IHT purposes as part of your estate, and you won’t pay tax on it.
This means that if you are looking to reduce your IHT bill by giving away lifetime gifts, it’s better to start doing this when you are younger and more likely to survive by seven years. The older you get, the riskier the gamble becomes.
Gifting Your Home
Your home is most likely the most valuable asset in your estate. Its value often represents the difference between an estate having to pay IHT or not having to pay it.
This, in turn means that many people are tempted to transfer ownership of their home to children or other relatives, usually with a view to avoiding IHT, but also commonly with a view to trying to protect their home from being sold and used to fund care home fees.
This temptation is very understandable because you’ve worked hard all your life to pay off the mortgage, and you want your loved ones to benefit from the value of your home. However, before you press ahead and sign the forms, here are a few reasons to reconsider:
1. If you leave your home to your children in your will, you benefit from additional IHT reliefs. These reliefs can be significant and, for many people, result in their estate not having to pay IHT after all.
2. If you sign away your home to somebody else, this means that you no longer have any control over it. This leaves you in a very vulnerable position. Whoever now owns your home is within their legal rights to evict you!
3. If you continue to live in your home without paying market rent to the new owners, you will be treated for IHT purposes as though you still own the property, even though legally, you do not.
4. Giving away your property will not necessarily protect it from future care fees.
5. Gifting a non-cash asset, such as a house, could have unforeseen and unwanted tax consequences for the new owners.
I’m thinking about making a gift – What should I do?
Firstly, slow down and think about it. It’s important not to act because you are being pressured by others or because someone you know has done something similar to what you are considering. If you thinking about making large lifetime gifts, you must seek qualified financial and legal advice before proceeding. This means that you can make a properly informed decision. This advice should consider not only tax but also the more practical consideration of whether you can afford to maintain your desired lifestyle after making the gift.
If you need expert advice for gifting a property, our team comes highly recommended by our clients on the independent review site Review Solicitors. You can read some of these reviews here.
If you’d like to talk to one of our team, you can contact us on 03301113131 or fill out our contact form, and we’ll get back to you as soon as possible.