Gifting the family home? Common myths about lifetime giving

A ‘lifetime gift’ is made when a person gives a sum of money or assets to another person during their lifetime, rather than on their death. Lifetime gifts are often recommended for asset preservation and tax planning, and they also give the person the enjoyment of seeing the gifts being appreciated during their lifetime.

However, there are many common myths about lifetime giving which mean you should take proper advice before acting. We’ve taken the opportunity to debunk some of these myths below.

1. All lifetime gifts are exempt from inheritance tax

Many gifts can be made without inheritance tax being payable, but only if they are structured correctly. If an outright gift is survived by 7 years, then it may be disregarded for inheritance tax purposes. However, if you die within 7 years there may be inheritance tax due on the gift, depending on the value of the gift and any previous gifts you have made.

Some gifts may have an immediate inheritance tax or capital gains tax charge such as gifts into a trust or gifts of property. For this reason, it is important to take appropriate advice and weigh up the tax treatment of the gift before it is made.

2. Gifting your family home to your children will avoid inheritance tax

To avoid an inheritance tax pitfall you must not take any benefit from an asset once it has been given away. This is a trap for the unwary, the prime example being a parent who gifts their property to a child but continues to live in it rent free. Even if the parent survives for 7 years after the gift, the property will still be included in the inheritance tax calculation when they die. So, care must be taken with these types of gifts to achieve any inheritance tax benefit.

Sometimes it is not obvious whether you have retained a benefit of an asset you have gifted. For example, if you give your holiday home in Cornwall to your children, will you be able to continue your annual holidays there? And can you continue to receive the rental income? It is easy it is to fall into the trap of continuing to benefit from an asset after the gift has been made but early advice can prevent the tax planning behind the gift being inadvertently undone.

Therefore, you should only give away assets that you no longer wish to benefit from. You will also need to consider whether you might need those assets in the future, to fund your retirement or any possible care needs.

3. You don’t need to review your Will

It is a good idea to review your Will when making a lifetime gift. You might be giving away an asset which is specifically mentioned in your Will, in which case the legacy in the Will would fail, or it may result in inequality between your children that you wish to redress on your death. Finally, it is useful to check whether the inheritance tax position on your death has changed as a result of the lifetime gift and a legal advisor will be able to advise you on any amendments to your Will which may improve your tax position.

If you are considering making a lifetime gift or amending your Will then we recommend you contact our team of experts for advice on your specific circumstances.