Lifetime gifts in probate

As well as the assets and debts in a person’s name, there are other factors to include in someone’s estate calculation when applying for probate. This includes the value of any gifts made during the person’s lifetime. Although making a lifetime gift is often done to reduce the amount of Inheritance Tax (IHT) payable on death, a gift isn’t always immediately excluded from the estate value.

What are lifetime gifts?

A lifetime gift is a transfer of an asset by one person (the donor) to another person (the beneficiary) while the donor is alive. The types of asset commonly transferred include cash, property and land, shares, or personal belongings.

A gift can also include selling something at less than market value.

There are three main types of lifetime gift:

  1. Exempt transfers
  2. Potentially exempt transfers (PETs)
  3. Chargeable lifetime transfers (CLTs)

Exempt transfers

Exempt transfers are gifts to specific beneficiaries that are immediately excluded from the estate’s value for IHT purposes. These beneficiaries include:

These gifts can be of an unlimited amount. In addition, these gifts do not require the donor to survive for a specific period.

Potentially exempt transfers (PETs)

PETs are gifts that may eventually be exempt from IHT if the donor survives for seven years from the date of the gift. If the donor dies within seven years, the gift is included in the estate’s value and may be taxed. The tax rate depends on how many years the donor survived after making the gift, following the seven-year rule.

There is a type of PET known as a gift with reservation of benefit, or a GROB for short. A GROB is made when the donor makes a gift, but continues to benefit from the asset transferred. The most common example of a GROB is when someone gifts their property, but continues to live in it rent-free.

This type of PET does not follow the usual seven-year rule. Instead, it doesn’t matter how long ago the gift was made; it will be included in the estate’s value.

Let’s assume that the donor gifting their property later decides to pay market rent to live there. Because the donor is no longer treated as benefiting from the property, because they pay rent, the 7-year clock can now start running. After this 7 years, the donor’s gift of the property will not be included in their estate value for IHT purposes.

Chargeable lifetime transfers (CLTs)

CLTs are gifts that are neither exempt nor PETs. These immediately attract IHT at the time of the gift, typically at a rate of 20%. Common examples include gifts to certain types of trusts or companies. CLTs are a complex area of lifetime gifting. It’s important that you seek advice if a donor has made a CLT, as certain gifts within seven years of each other can extend the IHT assessment period to 14 years.

What exemptions and allowances are available?

Annual exemption

A person can give away a total of £3,000 per tax year without the need to survive seven years. If their annual exemption was unused for the previous tax year, this can also be used.

Wedding and civil partnership exemption

In addition to the annual exemption, a person can gift £5,000 as a wedding/civil partnership gift for their child, £2,500 for their grandchild or £1,000 for anyone else.

Small gift allowance

A person can make as many gifts as they would like, up to £250, in a tax year. This is provided that the recipients have not received any other gifts from the donor that year.

Gifts out of income

Regular gifts made from a donor’s surplus income, as long as the donor maintains their usual standard of living.

What are my responsibilities as an executor?

As an executor, you must determine if any lifetime gifts should be included in the estate’s value. As a minimum, you should:

  1. Check if the deceased owned any assets during their lifetime that they no longer owned at death. You should also check whether the deceased sold those assets, or gave them away.
  2. If the deceased did make lifetime gifts, check if the deceased continued to benefit from any of those assets. You are checking if they made a GROB.
  3. Look for any gifts made within seven years before death and if earlier gifts were made within seven years of those.

What evidence of lifetime gifts am I looking for?

You can start by speaking to relatives, friends, and anyone who might have received gifts from the deceased.

Check bank statements for unusual transactions, particularly within the last three years. It is possible for you to request statements for the 6 years before death from the bank/building society.

Also, verify the status of any properties or assets mentioned in the will but not found in the estate and make a record of what happened to those assets, as you may need to mention this when you pay any IHT or apply for Probate.

Lifetime gifts which need to be included in the estate’s value are usually reported on HMRC’s form IHT400. By accurately reporting these gifts, it will help you avoid penalties and ensures proper tax compliance.