With careful planning, further and considerable parts of your estate can be given directly to your heirs now - rather than waiting until you pass away - without those gifts later being included when the tax man calculates whether your estate hits the tax threshold - provided you survive for seven years after you cease benefiting from the gift.
When making such lifetime gifts it is important that you are confident that you will never again require use of the asset that you are giving away. It is not possible to give an asset away AND for you to then retain use of that asset. The law requires that to take the asset out of your estate for tax purposes you must permanently deprive yourself of the benefit of that asset. If you wish to continue using a gifted asset you must pay a genuine market rent for your use of it. If you carry on using the asset that you have "given away”, the start of the seven year survivorship period is delayed. The asset therefore would never leave your estate for tax purposes as long as you continued to use it.
Nor is it possible for you to start benefiting from an asset that you have given away as soon as the seven years period runs out - you could be hit with an Income Tax charge instead.
HM Revenue & Customs will investigate any arrangement that appears to involve you retaining some form of enjoyment from an asset which you previously owned but which you are claiming you gave away. These investigations are probing and stressful.
Proper advice can ensure that your gift does not fall foul of any of these rules, so that - provided you survive seven years after you give the property away - the value of the asset will not be included when the tax man calculates whether your estate hits the tax threshold, and even if it still does, no tax will be payable on that asset
Lifetime gifts can also have Capital Gains Tax consequences though. Believe it or not, quite apart from any Inheritance Tax considerations, a lifetime gift of an asset is actually treated by the tax man as a 'sale' of the asset for Capital Gains Tax ("CGT”) purposes. CGT is levied on the "gain” that you make (generally, the value when you gave it away less the value when you acquired it), at 18% (or 28% if you are a higher rate Income Tax payer).
It is possible to avoid this CGT by transferring the asset slowly over several years (as you are allowed to make some gains each year without any CGT being payable). Alternatively, you can set up a lifetime trust and you can place the asset in question into that trust in one go.
