Most estate planning focuses on handing over your assets and wealth to your bloodline in your will and through Trusts. However, some of your family may soon have a more immediate need for financial help as the furlough scheme ends in October. They may be facing redundancy, and need some temporary financial assistance while finding a new job or shifting career.
You might also wish to support grandchildren who (perhaps a little unexpectedly) has got the grades required for university and want to take full advantage of this.
How to make a gift
You can gift members of your family in advance, so to speak, by using “lifetime transfers”. You can gift as much as you like, when you like, but they do have implications in terms of Inheritance Tax (IHT). So, you need to gift carefully to avoid tax bills later on.
You also want to make sure that any gift you make is protected and does not get caught up in future financial disputes, such as divorce or creditor/bankruptcy claims.
To discuss supporting your loved ones financially through gifts and trusts, call us at Panthera Estate Planning on 023 9226 8969.
We’ll set up an appointment where you can discuss all your requirements with our team, and understand your options. Then, we can help you set up your gifts and trusts with a fuller understanding of your requirements and wishes.
Types of financial gifts
There are two main types of financial gifts:
• Potentially Exempt Transfers (PETs)
PETs are lifetime gifts you make direct to an individual or to a bare trust. A bare trust is a basic trust in which the person the trust benefits has the absolute right to the capital and assets within the trust, as well as the income generated from these assets.
• Chargeable Lifetime Transfers (CLTs)
CLTs are lifetime gifts you make to another type of trust
Just to say, you can gift to your spouse at any time with no Inheritance Tax liability.
The seven year rule
If you survive for seven years or more after you make a PET gift, that gift has full exemption from Inheritance Tax. If you die less than seven years after gifting, then the gift’s value is included in your estate.
A CLT will not attract a liability for Inheritance Tax if it is covered by the nil-band rate (NRB) AND the person you gift survives for at least seven years after receiving your gift.
In practice, this means that if you are gifting now and survive for seven years, it’s a tax-efficient way of helping the family through potentially tricky financial times ahead. If you don’t survive for seven years, the amount you gifted minus any IHT tax liability exemptions is ‘returned’ to your estate. That effectively turns your gift into an ‘advance’ on the individual’s share of the estate.
Just want a summary of gifting to immediate family or a relative? Call us on 023 9226 8969 to discuss your requirements in a no-obligation online consultation.
Taper relief on PETs
OK, this is where gifting gets a little more involved. If you die within seven years of making a gift and it is ‘returned’ to your estate, taper relief can reduce the IHT liability. The person you make a PET gift to is liable for the Inheritance Tax due on the PET, and can benefit from any applicable taper relief. The Inheritance Tax due on the PET is deducted from the total Inheritance Tax bill, and the estate is only liable for the balance.
The longer the timescale, the less tax is due
The Inheritance Tax liability of the recipient of your PET changes over the passage of time. For the first three years after receiving the gift, they have full liability. Then a sliding scale is applied to reduce the liability between three and seven years.
So, if you gift to a family member and die within three years, they have full personal liability, which might prove tricky for them. Lifetime transfer gifts are dealt with in order of gifting after your death, and before your main estate. So, do try and live for as long as you can!
If this is all getting a little technical, call us on 023 9226 8969 to discuss ways you can help out the family financially through gifting and trusts.
Tax treatment of CLTs
When you make a CLT, it is assessed against your NRB for tax. If there is an excess above the NRB, it is taxed at:
- 20% if the recipient pays the tax
- 25% if the donor pays the tax
Again the seven year rule applies, so IHT becomes due on your CLT by the person who receives it for seven years after the gift. With IHT running at 40% currently, this could cut the actual financial gain of your gift down substantially, even with taper relief and credit for any lifetime tax paid.
Covering an IHT liability with assurance
In order to keep the proceeds of a PET or CLT out of the settlor’s estate, the potential Inheritance Tax difference can be calculated and covered by a level or decreasing term assurance policy. This would be written in an appropriate trust for the benefit of whoever will be affected by the Inheritance Tax liability. The level of cover required will very much depend on the circumstances, but offers a ‘safety net’ so that bills on your death do not strike the very people you wish to help now, or those you have already helped.
Even if your gift is within the NRB for IHT, you might still need cover. If you die within seven years, the full value of the transfer will be included in your estate. This has the knock-on effect that other estate assets up to the value of the PET or CLT could suffer tax, which would be avoided had you survived for seven years.
You can also set up a ‘gift inter vivos’, a life assurance policy that provides a lump sum to cover the potential Inheritance Tax liability that could arise if the donor of a gift dies within seven years of making the gift. This in turn is written in a trust.
Not sure how to make the most of your lifetime transfers?
We’re not surprised, it does all depend on your personal circumstances and what’s best for you and your family. So, contact us to discuss what you’d like to achieve through your gifts.
Your initial online consultation with us is free of charge, and we work on a fee basis for our estate planning work, not commission. So you can relax and know the gifting and trust planning advice you may receive is impartial and in your best interest.
TL;DR?
Call us! We’ll cut through the jargon to explain your gifting options and choices. 023 9226 8969.
For more information, see our Guide to Estate and Trust Planning