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Take care when giving a living inheritance

Last week a survey was publicised by some newspapers which found that, “the traditional inheritance is dying out” and that retired people prefer to give a “living inheritance” by making lifetime gifts to their family, partly to try to avoid an Inheritance Tax (IHT) charge on their death.

IHT is payable on estates exceeding £325,000 in value for an individual and £650,000 for a couple, and lifetime gifts to individuals are free from IHT if the person making the gift survives by seven years. A living inheritance is therefore a tax efficient way of dealing with your estate, provided that you retain sufficient for your own needs in older age.

However, giving a living inheritance can sometimes have traps that catch the unwary. Here are some points that you should think about:

  • If you have more than one child and make gifts to only one of them, perhaps a child who needs more financial help than their sibling(s), then if you wish your children to be treated equally overall, you might like to consider altering your Will in case something untoward should happen before you are able to equalise the gifts. A clause in your Will making it clear that the child who has received the lifetime gift should bring it into account against their share of your estate would ensure equality is maintained.
  • If you were to die within seven years of the gift, then the recipient would be primarily liable for any IHT on the failed potentially exempt transfer. If you do not wish this to be the case then again you would need to make provision in your Will.
  • Beware of one of your children getting the benefit of your £325,000 nil rate band to the detriment of the others. For example, David gives £300,000 to his son, Ed, in 2010 and £300,000 to his daughter, Charlotte, in 2012. David dies in 2014 so does not survive either gift by seven years. As the gift to Ed came first, Ed will not be liable to any IHT, as he has the benefit of most of his father’s IHT nil rate band. Charlotte, however, will be liable to over £100,000 in IHT.
  • Capital Gains Tax (CGT) is potentially payable on any gift of non-cash assets and should be considered.  Using a trust can help if CGT is an issue.
  • If you wish to ensure that your later life is not blighted by seeing your living inheritance fall foul of divorce and other claims, again using a trust as a protective mechanism might be the best way forward.