Inheritance Tax – When a gift might not be so gratefully received

Making a gift to your family or friends whilst you are alive may seem like a good way to reduce the overall value of your estate. It also allows you see the benefit that your generosity has on your loved ones during your lifetime. However, there is one instance where they may not thank you for it.


If the gift does not fall under one of the exemptions for Inheritance Tax purposes, it is a Potentially Exempt Transfer (PET). This means that if you were to die within seven years of making it, the person that received it may have an Inheritance Tax liability to pay.


If the value of the gift (taking into account any other taxable gifts within the timeframe) is in excess of your Nil Rate Band the excess will be liable to Inheritance Tax and the person who received the gift will be liable to pay it.  If this is the case, Taper Relief may apply to the amount of tax they have to pay.  The amount of Taper Relief will depend on how long it is since the gift was made that death occurs.


What can you do so that the gift can be received as you intended?


It is possible to put in place an insurance policy that provides a lump sum to the person you made the gift to. This will ensure that they have the funds to pay the potential Inheritance Tax liability that may arise if you were to die within seven years of making the gift to them. This is known as a Gift Inter Vivos plan.


How does it work?


The term of the policy would be for seven years, as after that time the gift should fall outside of your estate for Inheritance Tax purposes.


The lump sum provided will be in line with the potential Inheritance Tax liability and will decrease in line with the available Taper Relief.


The policy should be written under trust for the benefit of the recipient of the gift. This will ensure that in the event of your death within seven years, they will have the funds to pay any potential inheritance tax liability that may fall due on them.


Placing the policy in trust is an important part of this type of planning as failing to do so will mean that the value of policy will just be paid into your estate in the event of your death.  This will increase the value of your estate for Inheritance Tax purposes and the recipient of the gift will still have to find the money to pay the Inheritance Tax due on the gift.


Given the short term nature of this type of plan, it is often seen as a relatively inexpensive way of providing a means for the person who received the gift to pay the potential Inheritance Tax liability on a gift.


The information in this blog is not intended as financial advice. This is a complex area of financial and tax planning and the information given above is in general terms. The suitability of such a policy will depend on your individual circumstances and advice should be sought before making a gift or putting in place any kind of Inheritance Tax planning arrangement.


The information given is based on our current understanding of current tax law which is subject to change.


If you would like to discuss Inheritance Tax and Potentially Exempt Transfers in more detail, or you would like to speak with a member of our team, please contact Sam Davies or call 01772 821021 to be put in contact with a member of our Financial Planning team.