Definition
A lifetime gift is cash, property, or any asset you give away during your lifetime, which can reduce your inheritance tax bill if you survive seven years after making the gift.
Lifetime gifts are a crucial inheritance tax planning tool, allowing you to reduce the size of your taxable estate while helping family members when they need it most.
What Does Lifetime Gift Mean?
Under the Inheritance Tax Act 1984, a lifetime gift (also called an inter vivos gift, meaning "between the living") is any transfer of value you make while you're alive. This includes giving cash, property, possessions, or even selling something to someone for less than its market value—the difference counts as a gift. The legal effect is immediate: the value leaves your estate the moment you make the gift, unlike testamentary gifts made through your will which only take effect after death.
Most lifetime gifts become Potentially Exempt Transfers (PETs) under UK tax law. If you survive seven years after making the gift, it becomes completely exempt from inheritance tax. Sarah gives her daughter £50,000 for a house deposit in January 2020. If Sarah survives until January 2027, the entire gift is inheritance tax-free. If she dies in 2025 (five years later), the gift may be subject to inheritance tax at 40%, or a reduced rate under taper relief if her estate exceeds £325,000.
However, several exemptions are immediately tax-free without requiring seven-year survival. You have an annual exemption of £3,000 per tax year, which you can carry forward one year if unused. You can also give unlimited £250 small gifts per person (as long as they haven't received your £3,000 annual exemption), wedding gifts (£5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else), and unlimited gifts to your spouse or civil partner. Gifts made regularly from surplus income, without affecting your standard of living, can also be immediately exempt if properly documented.
The critical pitfall is the Gift with Reservation of Benefit (GROB) trap. If you give away an asset but continue to benefit from it—like transferring your house to your children but living in it rent-free—HMRC treats the gift as never made for inheritance tax purposes. The asset remains in your taxable estate regardless of how long you survive. David transfers his £400,000 house to his son in 2021 but continues living there without paying market rent. When David dies in 2030 (nine years later), the house is still included in his estate at its death value. To make the gift effective, David would need to either move out completely or pay his son full market rent.
Keep written records of all lifetime gifts with dates, values, and recipients. If you die within seven years, your executors must report these gifts to HMRC, and gifts made within that period reduce your nil-rate band (currently £325,000) before your estate is calculated. Only gift what you can genuinely afford to lose—you cannot reclaim gifted assets if your circumstances change.
Common Questions
"Can I give money to my children to help them buy a house without paying tax?" Yes, you can give your children money for a house deposit. You have an annual gift exemption of £3,000 that's immediately tax-free, and you can make unlimited larger gifts that become tax-free if you survive seven years. If you die within seven years, the gift may be subject to inheritance tax at 40% if your total estate exceeds £325,000.
"If I give my house to my son but keep living in it, does that reduce inheritance tax?" No, this doesn't work for inheritance tax purposes. This is a "gift with reservation of benefit" (GROB), and HMRC treats it as if you still own the house because you're benefiting by living there rent-free. To make the gift effective, you'd need to either pay your son market-rate rent or move out completely.
"How much can I give away each year without worrying about the seven-year rule?" You have several immediate exemptions: £3,000 annual exemption (can carry forward one unused year), unlimited £250 small gifts per person, wedding gifts (£5,000 to children, £2,500 to grandchildren, £1,000 to others), and unlimited gifts to your spouse or civil partner. You can also make regular gifts from surplus income if they don't affect your standard of living.
Common Misconceptions
Myth: I can only give away £3,000 per year without inheritance tax consequences.
Reality: The £3,000 annual exemption is immediately tax-free, but you can give away unlimited amounts as lifetime gifts. These larger gifts become Potentially Exempt Transfers (PETs) and will be completely inheritance tax-free if you survive seven years after making them. Many people unnecessarily limit their gifting because they misunderstand this distinction between immediately exempt gifts and potentially exempt transfers.
Myth: If I survive seven years after making a gift, it doesn't matter what happens—the gift is tax-free.
Reality: Surviving seven years only makes the gift tax-free if it was a genuine, outright gift with no strings attached. If you gave away an asset but continued to benefit from it (like giving your house to your children but living in it rent-free), it's a gift with reservation of benefit and the seven-year rule doesn't apply—the asset remains in your taxable estate regardless of how long you live.
Related Terms
Understanding Lifetime Gift connects to these related concepts:
- Potentially Exempt Transfer (PET): A lifetime gift that exceeds immediate exemptions becomes a PET—the technical tax term for what happens to your gift and how the seven-year clock works.
- Seven-Year Rule: This is the time period that determines whether a lifetime gift becomes fully exempt from inheritance tax.
- Inheritance Tax (IHT): Lifetime gifts are primarily a tool for reducing or avoiding inheritance tax, which is charged on estates over £325,000.
- Annual Exemption: This specific type of immediately exempt lifetime gift worth £3,000 per year doesn't require seven-year survival.
- Gift with Reservation of Benefit (GROB): This is a failed lifetime gift where the donor continues to benefit, showing what doesn't work for tax planning.
- Taper Relief: If the donor dies within the seven-year period, taper relief may reduce the tax on lifetime gifts made three to seven years before death.
Related Articles
- Estate Planning Strategies: Understanding lifetime gifts is essential for comprehensive estate planning and wealth transfer strategies.
- How to Reduce Your Inheritance Tax Bill: Lifetime gifting is a core technique for minimizing inheritance tax liability on your estate.
- The Seven-Year Rule Explained: Learn how long you must survive for gifts to become inheritance tax-free and how taper relief works.
- Tax-Free Gifts and Exemptions: Detailed guidance on which lifetime gifts are immediately tax-free without the seven-year wait.
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Legal Disclaimer: This glossary entry provides general information about UK legal terminology and does not constitute legal advice. For advice specific to your situation, consult a qualified solicitor.