If it is the other way round and the client’s income is less than what they want to be able to spend annually, then it is a different conversation – giving away too much too soon could leave them without the funds they require to live out the rest of their lives in the manner they please.
At this point, we would introduce cash flow modelling to identify how much a client needs to retain and how much they can afford to give away right now.
Gift motivation
If the gifting of assets is not driven by IHT planning and is simply a wish to pass on funds now to help other individuals/family members enhance their lifestyle, then a gift of cash is a good way to proceed for those with liquid assets.
This gives the recipient of the gift the flexibility to use the funds as they see fit.
Of course, for those with less liquid assets, gifting can be more of a challenge and care needs to be taken that capital gains tax implications are not created as a result of passing on assets (other than cash) to an individual.
From an IHT perspective, any outright gift made by one individual to another is referred to as a potentially exempt transfer.
Making outright gifts in lifetime to another individual is one of the simplest and most straightforward ways to undertake estate planning, while also achieving the aim of enhancing that individual’s lifestyle.
Provided they survive any such potentially exempt transfer by more than seven years, then the value gifted by the client will be outside their estate for IHT purposes. So, there is no immediate IHT charge – as long as the donor lives for another seven years.
If the donor dies, then these funds are potentially subject to a 40 per cent tax charge, as the value of the gift is included in the IHT calculation by the executors of their estate, subject to the offset of any available IHT reliefs and exemptions.
In other cases, clients are looking to make a gift to mitigate IHT on their death and retain protection over the asset.
If that is their motivation, the best option may be to put the money into a vehicle such as a trust or company, which not only allows the person making the gift to retain full control – managing who gets it, when they get it and how much they get – but can also minimise estate taxes when the donor dies.
Estate planning tools
