Is now the time for you to make lifetime gifts?

What are potentially exempt transfers (PETs)?

A gift between individuals which is not covered by an IHT exemption is known as a potentially exempt transfer (PET). PETs do not give rise to an upfront IHT charge but a charge can arise if you do not survive at least seven years after making the gift. A ‘failed’ PET which is not covered by the ‘nil-rate’ band (NRB of £325,000 and which does not qualify for an IHT relief or exemption will be taxed at 40%.  Should you survive for three or more years however, this tax rate is tapered for any transfers of value not covered by the NRB.

What Capital Gains Tax (CGT) is due on lifetime gifts?

While gifts between you and another person may not give rise to immediate IHT charges, CGT may be chargeable on the transfer of non-cash assets. The CGT on gifts is typically calculated on the basis of the open market value of the gifted asset. Subject to the asset being transferred, the gain may be exempt or reliefs may be available to reduce the CGT charge. Where a gain arises, the CGT annual exemption - £12,570 for 2022/23 – may be offset against this to reduce the CGT charge. 

The importance of timing for lifetime gifts 

While PETs may be a straightforward IHT mitigation mechanism, the rules can be complex and timing is important. For example, a gift of quoted shares during lifetime would give rise to both a CGT and a full IHT charge if the donor dies within three years of their gift. Had the shares been retained at death IHT would have been due but no CGT; in fact, the beneficiary would have received the shares with a CGT base cost uplift to the market value of the shares at the date of death.

Other key considerations

COVID-19 and geopolitical considerations have caused significant uncertainty, which will continue to unsettle the stock market, property prices and the wider economy. Anyone who has been considering lifetime gifts might find the values of the assets in question are lower, which can reduce the quantum of IHT and CGT.

Values will be easy to establish for listed investments, but for other assets a valuation will be required. For valuations to be accepted by HMRC they would need to be accurate with robust evidence to support the valuation. Now, while the markets remain unpredictable and the quantum tax is lower, could be the perfect time to consider your estate planning options.

If you’re considering making lifetime gifts, we can look at the tax position before you take any action, either as a standalone transaction or as part of an overall estate planning review. Fill out the form below and one of our tax specialists will be in touch to discuss your requirements and how we can help.