Gifts and Inheritance: What You Should Know

Recently I have had a number of clients ask me whether they need to update their Will as they have given a child, whether under or over 18, a sizeable cash sum, typically to help towards a property purchase or some other large project.

The answer, of course, is yes, but the reasons behind that simple response are quite complicated. Imagine a couple with two or more children and one of those children is given a significant lump sum during the lifetime of the parent. On the death of the parents, if the estate is to be distributed between the children, a number of complicated legal concepts come into play. These include ademption, the law of portions, the date of the Will compared to the date of the gift, and a whole range of case law dating back to the Victorian era.

Let’s take a very simple example. A parent dies, leaving their estate equally between two children, one of whom has had a significant cash advance during the lifetime of the parent. The key question is whether the estate should be divided equally between the two children, or whether the gift should be taken into account so that overall the children have received the same over time.

If you have made a substantial gift to a child and you have also benefited that child in your Will, your Will needs to make it clear whether the lifetime gift should be taken into account in calculating how much should be paid to that child on your death.

The rules do not just apply to children, but to any person whom you benefit in your Will where you have made the sort of gift that a parent might make to a child. This means the rules can apply to a gift made by an aunt or uncle or grandparent or even as a close friend of the family if the gift was such as to make provision for a child in the way that a parent might.

If substantial gifts are made in the lifetime of an individual who then dies, the value of those gifts may have to be taken into account in calculating the total value of the estate liable to inheritance tax. Generally, gifts made more than seven years prior to the date of death are not taken into account, although there are some complicated exceptions. A gift made within seven years of death may just use up part of the nil rate band for inheritance tax (currently £325,000). If that allowance has already been used up by earlier gifts within 7 years of death, then part of the tax due on death is attributable to the gift. The question in those circumstances is whether tax on the gift should be paid out of the estate or whether the recipient should be asked to pay the tax.

Again, there are rules and presumptions that apply but much the better course is to ensure that there are appropriate provisions in your Will so that your wishes take effect. The question of who pays the tax also needs to be taken into account when deciding what amount should be brought into account by the recipient when dividing the estate on death; back to the rules on portions as mentioned above.

While talking about inheritance tax on property, there are two key points to mention.

The first is that tax due on property need not be paid immediately on death. There is an option to pay by instalments over 10 years, although interest is charged on the unpaid instalments. This can be an attractive option where there is a wish to delay sale of the property, or it is let and the inheritance tax can be paid out of the rental income.

Secondly, a few years ago, a new inheritance tax allowance was introduced called the residence nil-rate band. This allowance means that an additional £175,000 can pass free of inheritance tax if the home of the deceased is left to a child. As always there are complicated rules that apply if, for example, the property was sold shortly before death or it was downsized before death, or the property is gifted into a trust rather than out right.

There also rules relating to the definition of child which can be relevant where the child’s parents are not married.

It is common in Wills to provide for children to inherit at 21 or 25 rather than 18. If a Will is not written correctly, there is a danger that the age limitation is not worded correctly, and the residence nil-rate band allowance will not apply. It is essential that the age limitation is worded in a particular way to comply with the rules surrounding gifts into trust which is, at law, what a gift to a child at 25 means. Read more about Will writing here.

If the Wills are correctly written, it is also possible in many circumstances on the death of the second parent for a residence nil-rate band allowance of the first parent to die to be available, meaning that in total £350,000 can pass to the children without payment of inheritance tax.

We are happy to advise in more detail upon these rules but two key points are that the parents must have been married at the time of the death of the first of them to die, and the home must be left to the surviving spouse. This can include a gift of a share of the home to the surviving spouse in trust, but it depends on the terms of the trust.

My experienced private client team can advise you on your individual circumstances around inheritance tax. To speak to us, call 01273 604123.

If you do not have a Will, or your current Will needs updating, it is essential that you call us at your earliest convenience on 01273 604123, or email us at enquire@bbc-law.co.uk to book your initial appointment. We offer meetings by video call or telephone if you would prefer a no-contact consultation.