Thinking about making a gift to a loved one, but not sure where to start? Whether you want to help a family member financially, give away a treasured item, or plan gifts as part of your estate, it’s important to understand the different ways to do it, and the potential tax implications.
Here, the team at Heritage Estate Planning explains your main gift options and what each one could mean for your estate and your beneficiaries.
Why Make a Gift?
Many people choose to make gifts as a way of sharing their wealth during their lifetime, whether that’s to help children or grandchildren get onto the property ladder, support a loved one’s education, or simply enjoy the satisfaction of giving.
Gifting can also play a part in inheritance tax planning, helping reduce the size of your taxable estate while ensuring your money benefits those you care about most. But it’s important to plan carefully. Some gifts can trigger tax consequences, while others may require you to survive for a set period before the value falls outside your estate.
That’s why understanding the different types of gifts and when each one might apply is so important.
Gift options
When it comes to making gifts, there’s no one-size-fits-all approach. The right option for you depends on what you want to give, who it’s going to, and whether you’d like to keep some control over how it’s used.
Below, we’ve outlined some of the most common ways to make gifts during your lifetime or after your death.
An absolute lifetime gift
If you’d like to see your loved ones enjoy your gift during your lifetime, such as jewellery, art, or even a financial contribution towards a house deposit, you can make an absolute lifetime gift.
Where the gift is valuable, it’s classed as a Potentially Exempt Transfer (PET) for inheritance tax (IHT) purposes. This means that if you live for seven years after making the gift, it will fall outside of your estate and no IHT will be due on it.
If you pass away within seven years, the value may use up part of your nil rate band or fall back into your estate for tax purposes. In short, lifetime gifts can be a wonderful way to pass on wealth early, but they do need careful consideration.
A gift into a lifetime trust
If you’d prefer to keep an element of control over how your gift is used, you might consider placing it into a lifetime trust. For tax purposes, this is known as a chargeable lifetime transfer.
Gifts into trust that exceed the nil rate band (currently £325,000) are subject to an immediate 20% charge. However, a trust can be a useful option if you’re concerned about issues such as a beneficiary divorcing, becoming bankrupt, or mismanaging funds. It allows you to provide support while protecting the asset.
Trusts can also help ensure your wealth stays within the family or is managed responsibly over time, something many parents and grandparents find reassuring.
A gift in your will
A gift in your Will lets you decide exactly what happens to specific items or sums of money after your death. Your Executors are responsible for ensuring these gifts are made, as long as you still own the asset when you die.
These gifts, known as specific gifts or pecuniary gifts (if it’s a set amount of money), are distributed before the residual estate. This means that if your estate reduces in value over time, such as through care costs, the residual beneficiaries may receive less than intended. It’s important to review your Will regularly to make sure your wishes still reflect your current situation.
It’s important to review your Will regularly, especially if your circumstances change. For instance, if your estate’s value decreases, a large specific gift to one person could unintentionally reduce what’s left for others. Regular reviews with a professional estate planner can ensure your Will always reflects your true intentions.
A Letter of Wishes
If you’d rather leave some flexibility for your Executors, a Letter of Wishes can be a helpful tool. It allows you to express your preferences for who should receive gifts or how your estate should be divided, without making those wishes legally binding.
While this document provides guidance rather than instruction, it can help Executors act in line with your values and intentions. It’s always wise to discuss your wishes with them in advance to avoid uncertainty later on.
Donatia mortis causa
This type of gift, often called a gift in contemplation of death, can only be made when someone believes death is imminent. The gift must be physically handed over to the beneficiary, and it only becomes valid if the person passes away.
For example, deeds to a property or car keys may qualify, but a cheque would not (as it cannot be cashed after death). This type of gift is rare and can be legally complex, so professional advice is essential.
Tax implications at a glance
When making gifts, it helps to understand how they fit into the wider picture of inheritance tax planning. Here’s a simple overview:
- Annual exemption: You can gift up to £3,000 per year without it being added back into your estate.
- Small gift exemption: Gifts of up to £250 to any number of people are usually exempt.
- Wedding or civil partnership gifts: You can give tax-free gifts of £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else.
- Regular gifts out of income: You can make regular gifts, such as helping a child with rent or school fees, provided they come from surplus income and don’t reduce your standard of living.
Combining these allowances with good advice can help you make meaningful gifts without creating unnecessary tax exposure.
Real-life example
Let’s say John wanted to help his daughter buy her first home. He gifted her £50,000 as a lifetime gift. Because he made the gift outright, it’s classed as a Potentially Exempt Transfer. If John lives for at least seven years after making the gift, it won’t be counted towards his estate for inheritance tax.
If, however, he passes away within seven years, the gift will either use part of his nil rate band or, depending on timing, be subject to taper relief, which gradually reduces the IHT due.
This example shows how timing, planning, and professional advice can make a big difference when it comes to financial gifts.
When to seek advice
Making gifts might sound straightforward, but each option comes with its own legal and tax implications. Whether you’re thinking about giving money, setting up a trust, or updating your Will, expert guidance will help ensure everything is structured correctly and tax-efficiently.
At Heritage Estate Planning, our qualified consultants can guide you through your gifting options, helping you understand the best approach for your circumstances. We’ll make sure your wishes are clear, your beneficiaries are protected, and your estate is managed with care.
Contact us today for a no-obligation consultation to discuss your plans and find out how thoughtful gifting can make a lasting difference for you and your loved ones.
