Lifetime giving – keeping it fair

Published by Nigel Moon on 15 December 2021

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Quite often parents want to help out their children by making sizeable lifetime gifts, for example to get them on the property ladder.  Naturally, the parents may want to make sure that they treat their children equally but that is not always as simple as it sounds and the timing of gifts can inadvertently produce unfair results, for two reasons.

The first is that if there is quite a length of time between gifts, then the value of an earlier gift can be much more than the value of a later gift of the same amount.  For example, property prices are likely to have risen so that it will cost more for the second child to buy into a property that is equivalent to that bought earlier by the first child – so should the second child be given more?

The second, which is often overlooked, is the potential effect on Inheritance Tax (IHT) and who suffers this.  To demonstrate this, let us take an example of a single (perhaps sole surviving) parent gifting cash to her three children Anne, Belinda and Charlie – and for simplicity assume we shall assume that the IHT nil rate band available to mother’s estate is the basic £325,000 and the usual annual allowance of £3,000 is already used.

The cash gifts were made as follows: Anne £200,000 on 1 April 2021, Belinda £200,000 on 2 April 2021 and Charlie £200,000 on 3 April 2021.

The cash gifts are in the first instance “potentially exempt transfers” or PETs and if mother survives all the gifts by 7 years (so dies after 3 April 2028) then all the gifts are IHT free so all gifting is equal.

But, what happens if mother dies on say 1 February 2024?  The gifts now become chargeable to IHT, subject to the nil rate band available, and the tax is payable by the child receiving the gift.  However, in calculating the IHT payable by each child, the nil rate band is set against gifts on a first come first served basis so that after the IHT each child has to pay, the gifts they receive are: Anne £200,000, Belinda £170,000 and Charlie £120,000.

If all three had received their gifts on exactly the same day, then the nil rate band would have been shared between them so that each would suffer £36,667 of IHT and receive net £163,333.  So, where possible, it is preferable for all gifts to be made on the same day.

There are other circumstances which can give unequal IHT charges, such as some gifts being made more than 7 years before death and others less than 7 years and the pattern of gifting by each parent.

How can your Will help

Our children are very rarely in financial need all at the same time. You might have gifted one child their house deposit, paid for another child’s wedding, and done neither for the other! If you have made large gifts to your children and/or plan to make further gifts, you could consider a clause in your Will to bring those gifts into account on your death and ensure the final amount received by all of your children is balanced. This is typically called a “hotchpot” clause.

The benefits of such a clause are:

  • Past and future gifts can be brought into account
  • You can specify a limit before a gift is caught by the clause, for example you may wish gifts under £3,000 to be disregarded
  • Gifts can be increased by a specified rate of interest to account for inflation.

A hotchpot clause can certainly give you peace of mind when making gifts during your lifetime and can reduce the risk of disputes between your children about unequal gifting when you die.

Where lifetime gifts give rise to an IHT charge on your death it is also possible for your Will to provide that any IHT due on those gifts is paid out of your assets, rather than by the person unfortunate enough to receive their gift last!

If you would like to discuss IHT with us, then get in touch.

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