When planning your Estate, a question that we are often asked is whether it is wiser to gift assets during your lifetime, or whether to leave them to a chosen beneficiary, under the terms of your Will. This decision can have significant inheritance tax implications in the UK.
The answer is rarely straightforward, as passing on wealth is not a simple legal or financial decision, and both approaches have various advantages and risks, depending on various factors, such as a client’s financial position, family circumstances, and long-term objectives.
Gifting vs leaving assets in your Will: What is the difference?
Firstly, it is important to be aware of the difference between lifetime gifting and testamentary transfers.
Lifetime gifting involves transferring an asset (e.g. a sum of money or a specific item), to another person, whilst you are still alive. After this transfer has been made, you no longer own or have the right to control the use of that asset. By way of contrast, leaving a gift under the terms of your Will means it will remain in your control during your lifetime, and will only be distributed to your chosen beneficiaries upon your death.
These two routes have different legal, practical, and tax implications.
How can Gifting reduce inheritance tax in the UK?
Arguably the main driver for lifetime gifting, is Inheritance Tax planning. When an individual makes an outright gift in their lifetime, provided they survive 7 years from the date of the gift, the gift is deemed to be outside of their Estate for Inheritance Tax purposes.
Additionally, an individual may make use of their annual exemption, which allows them to make gifts of up to £3,000 in a tax year, which will not be subject to Inheritance Tax implications. If the annual exemption is not used, it can be carried over from one previous tax year, giving an individual a gifting allowance of up to £6,000.
Separately, for individuals with surplus income, regular gifts can be made out of this surplus income without attracting any Inheritance Tax implications. However, please note that the requirements for gifts to be made out of surplus income are lengthy and specific and are outside the scope of this article.
Gifting and making use of annual exemptions by way of gifting, can therefore be a powerful tool for passing on wealth in a tax-efficient way.
The risks of gifting assets…
Whilst lifetime gifting can be an effective Estate planning tool, there are inherent risks associated with making gifts. Once a gift is made, the donor (the person making the gift) no longer has any control over the asset that they have given, leaving it exposed to changes in the recipient’s circumstances. For example, if there is a relationship breakdown and the recipient of the gift is subject to divorce proceedings, or you simply change your mind about wanting to give the gift, the asset cannot simply be “recalled”.
In addition, care must be taken to ensure that a gift is made outright, and that you, as the donor of the gift, do not retain any benefit in that gift. For more information on making a gift with reservation of benefit, see my previous Article “A Generous Gift or a Hidden Trap? Gifting your Property to the Next Generation…”.
Separately, regard must be had to ensure that the gifts made are not considered to be a deliberate deprivation of assets for care fee purposes. A deprivation of assets arises when an asset, property in this case, is gifted to another person, to avoid or reduce the payment of care home fees. In England, the current threshold for payment of care fees is £23,250; if capital is reduced below this sum, then you will no longer be responsible for the payment of care fees and the Local Authority will step in to make the payments on your behalf. However, if the Local Authority deem that money has been gifted with the intention of reducing or avoiding care fees, the Local Authority can deem the value of said Estate to still include the gifted property, and as such the individual who gifted the property would still remain responsible for funding their care. It is important to note that there is no time limit on gifts that the Local Authority can look back as in order to assess whether a deliberate deprivation of assets has been made. Be aware of making gifts when you are in poor health, or circumstances have arisen which makes it more apparent that you are likely to need care, as these are circumstances which are more likely to be subject to scrutiny by the Local Authority.
Furthermore, it is important to have regard to your own future financial needs; whilst it may seem that you have sufficient wealth to maintain your standard of living now, unforeseen expenses may arise in the future in regard to your own financial needs, and therefore, it is important to not underestimate your own financial requirements, to ensure that you are sufficiently provided for, first.
Advantages of leaving a gift in your Will
Leaving a gift under the terms of your Will, rather than making a lifetime gift offers a number of advantages in terms of Estate Planning. Firstly, an advantage is the retention of control; assets remain available to you during your lifetime, allowing for flexibility should financial needs change or unforeseen circumstances arise. A Will can also be updated as family dynamics evolve, ensuring that provision continues to reflect current intentions, particularly where relationships or beneficiary needs may be uncertain.
This approach is especially valuable where there is a possibility that assets may be required later in life, for example to meet care costs or other contingencies. Furthermore, a Trust can be incorporated in a Will, with a view to providing even further flexibility, upon your death. In particular, Discretionary Trusts can be used to provide flexibility during the distribution of your Estate, enabling Trustees to take into account the circumstances of each beneficiary, in accordance with your wishes.
It’s not just about the tax…
When considering lifetime gifting as part of Inheritance tax planning, it is important that such decisions are not driven solely by the objective of mitigating tax. Weight should also be given to the practical benefit to the recipient of the gift. In many cases, financial support provided during lifetime – such as assisting a child with a property deposit, can have a far more meaningful and immediate impact than a larger inheritance received on death.
Moreover, individual circumstances amongst beneficiaries may differ significantly; one child may have a more pressing financial need than others at a given time. In such cases, it may be appropriate to provide unequal lifetime gifts, whist ensuring that the overall Estate is distributed fairly. This can be achieved through “levelling up” provisions within a Will, ensuring that disparities are balanced on death so that each beneficiary ultimately receives an equal/ fair share of the Estate.
Should you gift assets or leave them in your Will?
Ultimately, whether making a gift in your lifetime is smarter than including the gift in your Will to take effect on death, is a circumstance specific decision, and depends on an individual’s priorities, as well as financial situation.
If you have surplus wealth and are comfortable with the concept of giving up control of parts of your Estate, during your lifetime, then it may be incredibly beneficial to consider making gifts in your lifetime as part of early Estate planning. However, with that being said, if your financial future is uncertain, and your family dynamics are more complex, it may prove more beneficial to provide for gifts within your Will, in order to retain sufficient flexibility.
Ultimately, it is important to find a middle ground, and in any event, to start considering Estate planning early, and whilst considering the tax implications, to also ensure that your decisions are aligned with your personal family dynamic.
How we can help with Estate Planning
If you are currently deliberating between gifting part of your Estate now, compared with leaving a gift in your Will, and would like Estate Planning advice tailored to your specific needs and circumstances, please contact us to arrange a meeting.
