Gift Inter Vivos
In the unfortunate event of your death, if you have made gifts in the preceding 7 years, it could land your giftee with an unexpected tax bill. However, that's where Gift Inter Vivos comes in.
In this insight, we cover all you need to know about gift inter vivos and how inheritance tax planning can protect your loved ones from the dreaded tax man.
At a glance
- Gift allowance
- £3,000 per year
- Nil-rate band
- £325,000
- Inheritance tax rate
- 40%
- Taper relief
- Years 3–7
Key Takeaways
- Gifts made within 7 years of death may result in an inheritance tax liability for the recipient.
- Gift Inter Vivos is a life assurance policy that covers the potential tax liability of a gift recipient.
- The policy's benefit amount decreases in line with the taper relief rates to match the tax liability.
- Placing the Gift Inter Vivos policy into a Trust can provide additional tax savings and protect the assets.
What is Gift Inter Vivos?
Gift Inter Vivos is essentially whole of life insurance. The policy is put in place to cover the inheritance tax liability that may arise if a Giftor passes away. The policy last for 7 years until a possible liability passes the liability window. This is known as the 7-year rule. Gift Inter Vivos is a technique used as part of inheritance tax planning to mitigate liabilities.
Gift Inter Vivos should be written into Trust. Otherwise, it can create further tax liabilities as the estate value will include the benefit amount paid out from the insurance policy.
Looking For Inheritance Tax Planning Advice?
If you're considering your inheritance liability, you may be wondering how to best manage it... Now is a good time to seek financial advice. Financial advice helps you to review your retirement, tax, and investment needs.
We can help you find a financial adviser to offer you the very financial advice. Complete our Sunny Fact Find form to provide us a bit more detail about your circumstances and we'll find the best-suited adviser for your needs.
Your appointed adviser will contact you to discuss how they can help, you decide how to proceed. This service is free.
How are Gifts Liable for Inheritance Tax?
The allowance for making gifts is £3,000 per year. You can split this allowance via different people so long as you do not exceed this value.
You can roll over any of your annual unused gift allowances for a maximum period of 1 year.
Gifts can be defined as:
- Money
- Household goods
- Personal goods
- Antiques
- Property
- Land
- Stocks & Shares
A gift can also include the discount amount when you sell your home for less than the market value in a 'discounted sale'. For example, you may sell your home to your children at a 50% discount. 50% of the actual property value will be considered a gift.
Gifts between spouses or civil partners are considered exemptions, along with gifts to charities and political parties.
If you exceed these allowances and pass away within 7 years of making the gift, it will form part of your inheritance tax liability.
Gift Inter Vivos and the 7 Year Rule
What is the 7 year rule in inheritance tax? If you make a gift and die within 7 years of making the gift, HMRC will consider this gift part of your estate. It will then become liable for Inheritance Tax. This is known as the 7-year tax inheritance tax rule. This rule exists to prevent people from gifting their entire estate to avoid their beneficiaries needing to pay tax.
If you have gifted, the value of these gifts will use part or all of your nil-rate band. The nil-rate band is the allowable threshold for IHT in the UK, currently £325,000. If the gift value is over the threshold, it could mean the beneficiary will be liable for the inheritance tax on this. If you're wondering why inheritance tax exists in the first place, we cover that in a separate insight.
Taper relief
Tax charged on gifts is not a flat amount throughout the 7 years. Taper relief provides the percentage of tax due and the relief available as the years pass.
The table shows the rate of tax payable based on the years between the gift date and death. 40% tax is due before 3 years, in line with the full inheritance tax rate. No tax is due after 7 years.
How does Gift Inter Vivos insurance work?
The Gift Inter Vivos is a life assurance policy. Life Assurance pays a guaranteed sum upon death. Also known as Whole of Life insurance. You can pay a monthly premium in return for a benefit amount. This premium is based on factors such as Age, benefit amount, and the length of the policy.
Life assurance benefits are generally used to cover funeral expenses and settle debts. However, in the case of Gift Inter Vivos insurance, it is used to pay the tax liability that would be due if death occurred during the 7-year period.
Gift Inter Vivos policies are set up with a fixed 7-year term. The benefit amount then reduces in line with the Taper Relief rates. This ensures that the benefit amount will always be equal to the tax liability.
This is cheaper than having a fixed benefit amount throughout the whole term. However, premiums are set up front and remain fixed throughout the whole of the 7-year insurance period. The premiums do not reduce year on year, just the benefit amount.
After the 7-year period has passed, the Gift Inter Vivos insurance cover expires. This results in no benefit amount being paid and premiums are no longer required.
Inheritance Tax can be complicated, and Taper relief might not always apply. It’s important to speak to a Financial Adviser about your potential tax liabilities before putting any policies in place.
Example of Decreasing Inter Vivos cover amounts
If a gift was made for £400,000, this would use the full nil-band allowance and an amount of £75,000 would be liable for IHT.
£75,000 would be taxed at 40%.
£75,000*40% = £30,000.
To cover this liability, a policy would need to be put in place for a cover amount of £30,000. However, as the years pass, the liability percentage lowers in line with taper relief.
Taper relief only starts to reduce the tax once you have survived three years from the date of the gift. The decreasing policy benefit therefore looks like this:
| Years between gift and death | Taper relief tax rate | Policy benefit amount (decreasing) |
|---|---|---|
| Less than 3 years | 40% | £30,000 |
| 3 to 4 years | 32% | £24,000 |
| 4 to 5 years | 24% | £18,000 |
| 5 to 6 years | 16% | £12,000 |
| 6 to 7 years | 8% | £6,000 |
| 7+ years | 0% | Policy expires. £0 benefit amount. |
When is Gift Inter Vivos Used?
This policy is used for people with large estates that want to make a gift more than their Nil Rate band. It can reduce their potential Tax bill. Especially if they are worried that should they die within 7 years of providing the gift the beneficiary will incur a tax liability. It will ensure that whoever receives the gift is not penalised by Tax as normally the intention of a gift is that it is passed to someone without cost.
Another question asked is, can I give my house to my children? If you do, Gift Inter Vivos can be used to settle any liability during the 7 years since the property was gifted.
Looking For Inheritance Tax Planning Advice?
If you're considering your inheritance liability, you may be wondering how to best manage it... Now is a good time to seek financial advice. Financial advice helps you to review your retirement, tax, and investment needs.
We can help you find a financial adviser to offer you the very financial advice. Complete our Sunny Fact Find form to provide us a bit more detail about your circumstances and we'll find the best-suited adviser for your needs.
Your appointed adviser will contact you to discuss how they can help, you decide how to proceed. This service is free.
Gift Inter Vivos in Trust
A Trust is a legal agreement designed to transfer the ownership of an asset from one person to another. By placing a life assurance policy into a Trust, the ownership of the policy is transferred out of the Estate. This means that no additional tax liability will be incurred for the insurance policy's benefit. Gift Inter Vivos life Assurance is also subject to this arrangement.
To ensure the most effective tax savings, it is recommended to place the life insurance policy into a Trust. Seeking the guidance of a financial adviser can help you assess your specific requirements and explore the various uses of Trusts.
By putting your life insurance policy into Trust, you can achieve efficient tax planning and protect your assets according to your needs.
FAQ
How do I get a gift inter Vivos quote?
We recommend seeking advice before quoting your own life insurance policy. An adviser will consider the taper relief within a decreasing policy which would be tricky to organise online, without help.
What is Gift Inter Vivos?
Gift Inter Vivos is a life cover that provides a benefit amount equal to any inheritance tax liability liable if death occurred post making a gift.
What does a gift inter vivos plan do in relation to inheritance tax?
The Gift Inter Vivos plan provides insurance cover for the inheritance tax that would be liable if death occurred post making a gift. It can be arranged so the benefit amount decreases in line with the liable tax amount.
Arranging Gift Inter Vivos Insurance
Gift Inter Vivos can be a complex policy. There are many considerations that need to be taken into account, therefore it is a good idea to seek advice. For a closer look at how the cover is priced and structured, see our companion guide on how Gift Inter Vivos insurance works.
