31 January 24

Inheritance now or later? The pros and cons of gifting

When it comes to an inheritance, choosing whether to give the money to beneficiaries now, or leaving it behind in a will, can be a difficult decision. Many clients will see the value in acting now, giving family members a head-start on some of their life plans, perhaps helping with a house deposit, paying off loans or debt, or making cash available to pay for school fees or university. It also means they get to make a meaningful difference to the lives of their family while being still alive to see it.


However, while gifting is a relatively simple way to reduce the value of a person’s taxable estate, the gifting rules are not so straightforward. So, it’s well worth making sure clients have a good understanding of the pros and cons of using gifting for estate planning, particularly as it may present additional Inheritance Tax (IHT) problems for the receiver of the gift later on.


What are the rules around making gifts?
First off, everyone has a £3,000 annual gifting allowance every tax year, known as the ‘annual exemption’. You can use the £3,000 annual exemption on one person or split it between several people. An unused annual exemption can be carried over to the following year, but this can only happen for one tax year. Smaller gifts (no more than £250) can be given to as many different people as you wish every tax year, provided those people haven’t also received a gift as part of the £3,000 annual exemption.


However, the rules get more complicated, particularly when it comes to larger gifts. No tax is due on any gifts provided the giver (or donor) lives for seven years after the gift was made (known as the ‘seven-year rule’). But before the seven-year milestone is reached, the gift is deemed by HMRC as a ‘potentially exempt transfer’ or PET. Should the donor die within seven years of making the PET, its value is added back to the value of their estate, meaning that – depending on the size of the gift – it could use up some or all of their existing IHT nil-rate band. What’s more, any IHT bill due on the value of the gift must be paid by the recipient.


And if the donor dies within the first three years of making the PET, the full 40% IHT rate is applied after any nil-rate band has been used. However, taper relief progressively reduces the rate of IHT payable on gifts between three years and seven years before the client’s death. After a full seven years, the gift is no longer considered a PET and is no longer part of the deceased’s taxable estate.

Some of the downsides with gifting

One of the biggest, and most difficult, downsides for clients to consider is that having made a gift of their wealth, it is no longer theirs. It can be very difficult to reclaim a gift after it has been made. This could become a problem if they need to rely on it at some point in the future, perhaps to pay for unexpected costs such as care home fees. For example, what if that money has been used to pay off debt or used as a house deposit? If the receiver themselves no longer has access to it, it could make life difficult for everyone.


This lack of access to the gift could also present difficulties in situations where the giver doesn’t survive the full seven years, and the gift becomes part of their taxable estate and uses up their nil-rate band. The receiver of the gift will be required to part the IHT due on the gift, which again could present difficulties if they have already spent it.


Are there other options better suited for clients?

In some cases then, particularly when larger sums are involved, perhaps the client would be better off not giving their assets away during their lifetime, and instead retaining control over the asset and not risking the gift leaving behind an uncomfortable IHT bill for beneficiaries to deal with. One example worth considering would be investments that qualify for Business Relief. These become exempt from IHT after just two years, provided they are owned at the time of death. This is clearly a much faster way of achieving full IHT exemption compared to the seven-year wait needed before a gift becomes fully IHT-exempt.


Another advantage of an investment in Business Relief-qualifying companies is that the shares are held in the client’s name, and stay under their ownership for as long as they own them. This means clients can choose to sell the investment and have some – or all – of the money returned should they need it (although any money withdrawn from the investment would no longer be exempt from IHT).


Lastly, when the time comes, claiming Business Relief on the investment will be a straightforward process carried out by the executor of the client’s will or the administrator of their estate. They simply need to contact the manager of the investment and they can act in accordance with the deceased’s wishes. This could include transferring the entire investment to beneficiaries, selling part or all of the investment and paying the proceeds to beneficiaries, or using some or all of the investment to pay an outstanding IHT bill due on the estate.


Triple Point: Here to help

At Triple Point, we understand that estate planning is a sensitive, and often complicated, subject. That’s why we have a range of estate planning client scenarios that set out specific client issues that can be solved using Business Relief. For more information, visit triplepoint.co.uk or ask your local Triple Point Business Development Manager for details.


Important information

Tax treatment depends on the individual circumstances of the investor and is subject to change. Tax reliefs depend on the investee companies maintaining their qualifying status. This article has been issued by Triple Point Administration LLP which is authorised and regulated by the Financial Conduct Authority no. 618187.

Tags on this post: adviser education, estate planning