Lifetime gifting remains one of the most effective, and frequently misunderstood, tools in inheritance tax (IHT) planning. While the core concepts are familiar, their practical application can be nuanced, particularly where trusts are involved or where clients have a long and varied gifting history.
Understanding the distinction between potentially exempt transfers (PETs) and chargeable lifetime transfers (CLTs) is the essential starting point. Outright gifts to individuals are PETs and fall out of scope for IHT if the donor survives seven years from the date of the gift. By contrast, most gifts to trust are CLTs and trigger an immediate lifetime IHT charge at 20% to the extent they exceed the available nil‑rate band.
The seven‑year rule
The “seven‑year rule” remains fundamental to lifetime planning. Where a PET fails because the donor dies within seven years, the gift becomes chargeable to IHT on death. In practice, record‑keeping is critical. Advisers are often instructed late in the process, sometimes only after death, and must reconstruct a client’s lifetime of gifting. Regular review of gifting patterns, particularly where PETs form part of a broader strategy, is essential to avoid unwelcome surprises for executors and beneficiaries.
Gifts to trust and the fourteen‑year rule
The seven-year rule can quickly become the fourteen-year rule without careful planning. A gift to trust is a CLT and may trigger an immediate lifetime charge if the nil‑rate band is already used. When calculating IHT due on death, any CLTs made in the seven years before death are brought back into account. If a PET is made within seven years of an earlier CLT, and the donor dies within seven years of that PET, both transfers are taken into account. This arises as the nil-rate band is applied to lifetime transfers in chronological order meaning until seven years have passed from the date of the CLT, the nil-rate band is not refreshed and will therefore be unavailable to use against a later failed PET.
This commonly affects clients who have made staggered trust gifts over many years. Advisers should be aware of the cumulative impact and ensure clients understand that trust planning requires coordinated, forward‑looking advice rather than isolated one‑off transfers.
Additional technical gifting points to look out for
A number of additional issues regularly arise in practice, including:
- Gifts with reservation of benefit: A classic pitfall, particularly in relation to property, where continued occupation can result in the asset remaining within the donor’s estate for IHT purposes.
- Annual exemptions and normal expenditure out of income: These exemptions are often underused. Proper documentation is vital, especially where clients make regular gifts from surplus income.
Conclusion
Lifetime gifting remains a powerful planning tool, but one that demands technical precision and ongoing review. For advisers, the challenge is not simply understanding the rules but helping clients navigate the long-term consequences of gifts made many years, and sometimes decades, earlier. Accurate record‑keeping, clear communication and proactive advice remain the cornerstones of effective estate planning.
For more information, please get in touch with our wills and estate planning lawyers.
Contributor
Solicitor
