So, you’ve decided that you would like to make a gift to someone but unsure of the best way of doing this. We have put together some pointers for you.
An absolute lifetime gift
If the item you want to gift is a personal item, like some jewellery or a painting for example, you may wish to give this away during your lifetime to see the enjoyment from your beneficiary. If the gift is valuable, perhaps money for a house deposit, or an item which reduces the value of your own estate, then it would be treated, for inheritance tax purposes, as a Potentially Exempt Transfer (PET). This means that once you have made the gift, you would need to survive for seven years for it to ‘fall outside’ of your estate. If you were to die within the seven years, the value of the item would either use some of your nil rate band (if available) or fall back into your estate and inheritance tax would be payable on it.
A gift into a lifetime trust
This, for tax purposes, is treated as a chargeable lifetime transfer and if this gift, along with any other gifts your have made, exceed the nil rate band (currently £325,000), it will be subject to immediate tax of 20%. This is an option for you if you prefer the idea of not giving the gift ‘absolutely’ due to worries about a beneficiary divorcing or becoming bankrupt or perhaps you prefer the money to be controlled so that it is not spent inappropriately.
A gift in your will
If you want to be absolutely certain that the gift is made on your death, you can make a specific gift in your will. It will therefore be part of the Executor’s duties to ensure the gift is made – as long as it is still owned by you when you die. Specific gifts in your will are paid out of the estate after taxes, funeral expenses and other testamentary expenses in a specific order. Specific gifts or Pecuniary gifts (if the gift is a specific sum of money) will be paid before your ‘residual estate’. This means that if in later years, the value of your estate has decreased significantly, perhaps due to care costs, the specific gifts you name could mean there is no residue. This is particularly important if you intend the bulk of your estate to go to your children, for example, but wanted to make gifts to grandchildren as well. The gifts to your grandchildren would be made first and this could mean there is little/no residue left for your children.
A Letter of Wishes
Some people prefer for their Executors to ultimately decide on gifts at the time of death, due, in part to the challenges raised above. This can be achieved by a carefully worded letter of wishes which provides guidance to your Executors on your thoughts about gifts and beneficiaries. It should be noted that a letter of wishes is simply that, and not legally binding. If you take this option, it would be advisable to discuss your thoughts and wishes with the people you have nominated to be your executor.
Donatia mortis causa
Otherwise known as a gift in contemplation of death. To qualify, this gift can only be made if you believe death is imminent and the gift in question must be ‘handed over’ to the beneficiary. The gift is also contingent on your death. A cheque written to the beneficiary, for example, wouldn’t be valid as it could only legitimately be paid in once you die (contingent on death) but once you die, payments are not allowed to be made from your account. There have been cases where the deeds of the house were handed over and car keys given and these were deemed valid.
As with all estate planning, it is essential to take advice from an expert so that all possibilities can be considered and weighed up by you. Our qualified team are on hand to answer any questions you may have.