Personal Law

As part of planning for the future, many want to ensure that their wealth passes to their family and loved ones. Making a will ensures that your assets pass where you want them to pass in the event of your death. However, what about protecting your assets and making provision for your family now, while you can see the benefits of it?

Lifetime gifting

You may wish to make a lifetime gift to your children, grandchildren, family or friends. The benefit of doing so is ‘gifting with a warm hand’ and being able to offer financial assistance to your family during your life. There are also inheritance tax (IHT) benefits to lifetime gifting. However, there are some points for consideration:

  • Affordability

Before undertaking any lifetime giving it is important to consider whether you can afford to make the gift. Various rules exist that typically mean that once a person has given away an asset for IHT purposes, he or she cannot benefit from that asset after the gift. So, before making gifts (especially significant ones) you should retain sufficient assets to ensure that your personal financial position is protected.

  • Tax implications

For IHT purposes, a lifetime gift from one individual to another is known as a ‘potentially exempt transfer’ (PET). A PET is potentially exempt and becomes entirely exempt from IHT provided the donor survives seven years after making the gift. We have previously blogged about the benefits of gifting for IHT purposes and what exemptions are available . However, the other tax implication to bear in mind is capital gains tax (CGT). Making a gift is likely to be a disposal for CGT purposes and may trigger a CGT liability.

  • Recipient – outright or in trust?

It is also important to consider the potential consequences of making outright gifts to people, particularly where substantial values are involved. As soon as you make an outright gift to someone, you lose control over that asset and you cannot dictate what the recipient should or should not do with the gift. Will the recipient be able to manage the asset that he or she has received? Are they too young to receive a substantial amount of wealth? Will the asset be exposed to other risks, for example, if the recipient were to divorce, die or get into financial difficulties?

Gifting to trust

If you have concerns about gifting outright and wish to ensure the asset you are gifting is protected, you can make a gift to trust.

  • FlexibilityA trust allows you to hold assets for one beneficiary or a number of beneficiaries. Different trusts can be used to fit in with your objectives and a trust can allow the trustees to adapt to circumstances as they arise.
  • ControlWhile you are likely to lose control when you give assets away outright, you can retain some control over the assets in trust as you decide who the trustees are, and you can include yourself as a trustee.
  • Asset protectionThe main advantage of using a trust is the added protection it can provide for the assets held in trust. There is no exposure of assets if the beneficiary is too young, or is going through a matrimonial breakdown or is declared bankrupt.

It is important to consider the tax consequences of gifting to trust, which are slightly different to gifting outright. For IHT purposes, you can only gift a certain amount into trust (your nil rate band, subject to any previous lifetime gifts) before you have to pay an upfront IHT liability. For CGT purposes, there will be a disposal, as mentioned above. However, there is the benefit of applying for CGT hold over relief, which can be applied for when gifting to trust, and which essentially delays the CGT payment.

Of course, as it is World Alzheimer’s Month, it is important to remember that you must have the necessary capacity to be able to make a gift. If you don’t have capacity but have a power of attorney in place, your attorneys may have the ability to make gifts on your behalf.

The advice remains the same…

Plan for your future and plan early. There are a number of advantages to lifetime gifting and there are options available as to how and when you undertake lifetime gifting. We recommend that you come and speak to us and we can assist you with planning for your future.

Chloe Fitzgerald

Chloe is an Associate in the personal and family department, based in Aberdeen. She advises on many aspects of private client including the preparation of wills and powers of attorney, estate and succession planning and the administration of trusts and executries.
Chloe Fitzgerald