Lifetime gifts and Inheritance Tax: how to notify HMRC

You may be aware that, if you make gifts during your lifetime, they become exempt from Inheritance Tax (IHT) after seven years. However, many people are unsure how to report these lifetime gifts to HMRC. To help you plan ahead, we take a look at the so-called ‘7-year rule’ and how to ensure any lifetime gifts you make are compliant with the taxman.

Why make lifetime gifts?

We have already published an in-depth guide on the rules for IHT on gifts. This will be of interest to a growing number of people – increasing numbers of estates have become liable for IHT on gifts in recent years.

Generally speaking, Inheritance Tax is payable on estates worth £325,000 or more. This increases to £650,000 if a person dies and passes on their £325,000 tax-free allowance to their spouse or civil partner.

Therefore, if your estate is likely to be worth more than these amounts, making lifetime gifts can be a smart way to reduce a future Inheritance Tax bill.

How do lifetime gifts work?

If you make a lifetime gift and live for more than seven years, then no Inheritance Tax is payable at all. However, if you live for less than that time, tax rates are applied on a sliding scale. For example, if you gifted a child £50,000, the following amounts of IHT would be due.

• 0-3 years: 40% / £20,000 (i.e. the standard rate of IHT)
• 3-4 years: 32% / £16,000
• 4-5 years: 24% / £12,000
• 5-6 years: 16% / £8,000
• 6-7 years: 8% / £4,000
• 7+ years: 0% / £0

As you can see, the earlier you plan, the more likely it is that your gift will attract the 0% rate of IHT. However, it’s worth noting that you can take out Inheritance Tax insurance. These policies – also known as ‘gift inter vivos’ plans – will pay out any tax owed if the person who has made the gift dies within seven years.

How do I report lifetime gifts?

Lifetime gifts are also known as PETs, or ‘potentially exempt transfers’. It is possible to report these to HMRC using a Schedule IHT403 form. However, you do not need to complete this when you make the gift or even during your lifetime.

If you don’t complete the form, your executors will need to do so as part of the probate process.

That said, it’s still important to keep a detailed record of any gifts you make. Your executors will thank you for it further down the line.

What records should I keep?

Whenever you make a lifetime gift, you need to keep a record of the following information:

• The date of the gift
• Who received the gift
• The value of the gift
• Where the funds came from
• Any applicable exemptions (see Gov.uk for full details)

If we act as your accountant, we would strongly advise providing us with these details, plus any associated paperwork such as evidence of bank transfers. We can also advise you about any exemptions that may apply to your gift.

Can I get help with Inheritance Tax?

Yes. If you would like advice about any aspect of IHT, please get in touch today. We not only offer an Inheritance Tax planning service, but also provide wider estate planning services such as Will writing and setting up a Lasting Power of Attorney. Call free on 0800 6520 025 to arrange an appointment with a member of our team.