Gifts and Lifetime Transfers
Lifetime Gifts and Transfers of Value
It is quite natural for an indiviual to want to pass their Estate down to their beneficiaries intact. We all tend to accumulate assets throughout our lifetimes and there are times when we feel the desire to make gifts of property or money to our loved ones during our lives. Whilst we are all free to do this whenever we want, it is important to be aware of the potential implications of such gifts with regard to IHT.
We have discussed previously that the "trigger" for a potential IHT liability is known as a "transfer of value". A "transfer of value" takes place when a gift or disposal of an asset takes place which results in a reduction to the net value of your Estate. Any gift you make above and beyond or outside the HMRC's accepted exemptions to IHT would invariably result in a "transfer of value" taking place.
Gifts in Excess of IHT Exemptions
The IHT treatment of Lifetime Gifts made in excess of the IHT Exemptions would vary according to they type and nature of such gift. As far as IHT is concerned these gifts in excess could be deemed as either "Potentially Exempt" from IHT, whereby the Donor would need to survive for a further 7 years after making the gift for it to fall outside their Estate for IHT purposes, or, if the gift was made to certain types of Trust, the gift would be deemed a "Chargeable Lifetime Transfer" resulting in an IMMEDIATE IHT liability. More information can be found on our Potentially Exempt Transfers and Chargeable Lifetime Transfers sections.
Potential Capital Gains Tax (CGT) on disposals of an asset
Another very important consideration and ignored at one's peril would be the potential for a CGT liability to be triggered on a disposal of an asset. That is to say that the simple act of a gift may not only potentially lead to an immediate IHT liability, but may also result in a Capital Gains Tax liability in addition! Something of a "double whammy" for the unitiated but the nice folk at the HMRC won't mind too much!
Sale of an Asset at a "knock down" price
If one was to sell an asset, for example a painting worth £10,000 to one's daughter for £5 for example, clearly a "transfer of value" has taken place, in so much as the Estate value has been reduced by £9,995. As far as IHT is concerned the transaction would have been regarded as a "Potentially Exempt Transfer" of £9,995 and the Donor would need to survive for the next 7 years for the "gift" to be considered free of IHT.
HMRC would also no doubt be very "interested" in the transaction since a "disposal" has taken place of an asset as far as CGT is concerned!
Lifetime Gifts to Trusts
Gifts to Trusts have always been popular since establishing a Trust affords a way of making a gift NOW for the FUTURE benefit of specific beneficiaries in the case of a "Fixed Interest" trust, or class of potential beneficiaries in a "Discretionary" type Trust.