HM Insights

Review of the taxation of Lifetime Gifts - how much can you give tax-free?

Following a report commissioned by HM Treasury, The Office of Tax Simplification (OTS) has recommended major changes to the current Lifetime Gifts rules in their latest review published on 5 July 2019.

The review was issued following the analysis of surveys and responses received by OTS which suggested that the general public felt the rules and administration of Lifetime Gifts was overly complicated and required to be updated.

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How much can I gift under the existing regime?

Currently, residents domiciled in the UK have an Inheritance Tax (IHT) threshold of £325,000 and are allowed to gift £3000 tax free to another individual in every tax year. This can be doubled to £6000 if the previous tax year's allowance has not been used but only for a maximum of one year.

Additionally, a sum of £250 can be gifted to as many individuals as a person wishes tax free within a tax year. Wedding gifts of up to £5000 to children, £2500 to grand or great grandchildren and £1000 to any other person are also exempt for tax purposes.

With the exception of a gift with reservation (where the donor retains a benefit from themselves), an individual's estate will pay no inheritance tax on a gift if they survive for seven years following the gift being made. If an individual exceeds their above allowances and passes away within seven years of making such gifts with the result that tax becomes payable, a tapering system applies.

The tapering system reduces the tax charged on the gift as follows:

  • Up to 3 years after gift is made - 40% IHT
  • 3 – 4 years after gift is made - 32% IHT
  • 4 – 5 years after gift is made - 24% IHT
  • 5 – 6 years after gift is made - 16% IHT
  • 6 – 7 years after gift is made - 8% IHT
  • 7 years after gift is made - 0% IHT

A five-year rule and one overall limit?

The OTS has recommended reducing the seven-year rule to five years. The justification presented is one of practicality. It is often the case that institutions, such as banks, do not hold records for periods as long as seven years and often gifts made become untraceable.

In addition, it has been proposed that the current exemptions, as well as the tapering system, be abolished with a general personal gift allowance being introduced to simplify matters.

At this stage, it is unclear what value should be placed on such an allowance, or how it would operate in practice.

Get in touch

If you require advice about how to deal with any Lifetime Gifts you have made or intend to make, please get in touch with a member of our team.