Gifts *Inter Vivos*

Detailed Definition

*Gifts inter vivos refer to gifts that an individual gives during their lifetime. These gifts have specific implications for inheritance tax, and the tax treatment depends on several factors, such as the amount of the gift, the occasion of the gift, and the recipient of the gift.

Examples

Small Gift to a Friend: John gives his friend a £200 birthday present. This gift is covered by the small gifts exemption because it is less than £250.
Annual Exemption Gift: Jane gives her nephew £2,500 during the year. Since this amount does not exceed £3,000, it falls within her annual exemption allowance.
Wedding Gift: Peter gifts his daughter £5,000 on her wedding day. This gift is exempt from inheritance tax because it is made on the occasion of marriage.
Potentially Exempt Transfer: Martha transfers £50,000 to her brother. This gift is potentially exempt, meaning it will only become liable to tax if Martha dies within seven years of making the gift.
Discretionary Trust: Sarah transfers £100,000 into a discretionary trust. This gift will be taxed at the lifetime inheritance tax rate, which is half the death rate, dependent on previous chargeable transfers within the last seven years.

Frequently Asked Questions

What is a small gifts exemption?
- Small gifts exemption allows for gifts of up to £250 per person per tax year to be exempt from inheritance tax.
What is the annual exemption for gifts?
- An individual can give away up to £3,000 in gifts each tax year without those gifts being liable for inheritance tax.
What makes a gift a potentially exempt transfer?
- A gift is potentially exempt if it is made to another individual and only becomes taxable if the donor dies within seven years of making the gift.
How are gifts to discretionary trusts taxed?
- Gifts to discretionary trusts are subject to inheritance tax at lifetime rates, which are generally half the death rate.
What happens if I give more than the annual exemption amount?
- Gifts exceeding the annual exemption could be taxed if they do not fall within another exemption, like the marriage gift exemption, or if they are not covered by the small gifts exemption.
Does the occasion of the gift matter for inheritance tax?
- Yes, certain occasions, like marriages, can offer additional exemptions from inheritance tax for gifts.
What is a chargeable transfer?
- A chargeable transfer is a transfer of value that reduces the value of an estate and is subject to inheritance tax.
Can I give gifts to charity without inheritance tax?
- Gifts to charity are usually exempt from inheritance tax.
How does the seven-year rule apply to inter vivos gifts?
- If the donor of a potentially exempt transfer dies within seven years of making the gift, the gift could become subject to inheritance tax.
What are exempt transfers?
- Exempt transfers are specific types of gifts that are not subject to inheritance tax, such as gifts to spouses, civil partners, or charities.

Small Gifts Exemption: An allowance where gifts of up to £250 per person per tax year are exempt from inheritance tax.
Annual Exemption: An allowance enabling an individual to give away up to £3,000 in gifts each tax year exempt from inheritance tax.
Potentially Exempt Transfer (PET): A gift between individuals that only becomes liable for inheritance tax if the donor dies within seven years.
Discretionary Trusts: Trusts where the trustees have the power to decide how the trust income and capital are distributed.
Chargeable Transfers: Transfers of value that reduce the value of an estate and are typically subject to inheritance tax.
Exempt Transfers: Specific transfers exempt from inheritance tax, such as those to spouses or charities.

Online References and Resources

Suggested Books for Further Studies

Inheritance Tax Simplified by James Smith
Understanding and Reducing your Estate Taxes by John Parker
The Taxation of Trusts by David Marks

Accounting Basics: Gifts Inter Vivos Fundamentals Quiz

### What does the term "gifts *inter vivos*" mean? - [ ] Gifts made after one's death. - [ ] Inheritance tax on estates. - [x] Gifts made during an individual's lifetime. - [ ] A type of trust fund gift. > **Explanation:** Gifts *inter vivos* refer to gifts that are made during an individual's lifetime. ### What is the small gifts exemption for an individual? - [ ] £100 per person per tax year - [ ] £500 per person per tax year - [x] £250 per person per tax year - [ ] £1,000 per person per tax year > **Explanation:** The small gifts exemption allows an individual to give up to £250 per person per tax year without those gifts being liable for inheritance tax. ### What is the limit for the annual exemption for gifts? - [ ] £1,000 - [ ] £2,000 - [x] £3,000 - [ ] £4,000 > **Explanation:** An individual can give away up to £3,000 in gifts each tax year without those gifts being liable for inheritance tax as part of the annual exemption. ### When does a potentially exempt transfer become liable for tax? - [x] If the donor dies within seven years of making the gift. - [ ] Immediately upon making the gift. - [ ] After ten years. - [ ] Only if the recipient sells the gift. > **Explanation:** A potentially exempt transfer becomes liable for inheritance tax if the donor dies within seven years of making the gift. ### How are gifts to discretionary trusts taxed? - [x] At the lifetime inheritance tax rate. - [ ] They are tax-free. - [ ] At the full death rate. - [ ] They are taxed as income gifts. > **Explanation:** Gifts to discretionary trusts are subject to inheritance tax at lifetime rates, which is generally half the death rate. ### What is the maximum amount allowed for small gift exemption? - [ ] £50 - [ ] £100 - [x] £250 - [ ] £500 > **Explanation:** The small gift exemption allows gifts of up to £250 per person per tax year to be exempt from inheritance tax. ### Are wedding gifts exempt from inheritance tax? - [ ] Yes, up to £500 - [ ] Yes, up to £1000 - [x] Yes, on the occasion of marriage - [ ] No, they are fully taxable > **Explanation:** Wedding gifts are exempt from inheritance tax if they are given on the occasion of marriage. ### What determines whether a gift to discretionary trusts is taxable? - [ ] The type of property involved - [ ] The relationship between the donor and recipient - [x] The size of the transfer and previous chargeable transfers - [ ] Whether the trust has distributable gains > **Explanation:** The level of tax on gifts to discretionary trusts depends on the size of the transfer to the discretionary trust and the amount of previous chargeable transfers within the preceding seven years. ### If an individual gives more than the annual exemption limit, what could happen? - [x] The excess could be subject to inheritance tax. - [ ] The gift is automatically tax-free. - [ ] The total gift is completely taxable. - [ ] Only the annual limit is taken into account for tax. > **Explanation:** Gifts exceeding the annual exemption could be taxed if they do not fall within another exemption, like the small gift exemption, or if they are not covered by another exemption rule. ### What is a chargeable transfer? - [ ] A tax deduction allowed on gifts - [ ] A necessary legal formality for gifting - [x] A transfer of value that reduces the estate value and is subject to inheritance tax - [ ] A way to avoid inheritance tax > **Explanation:** A chargeable transfer is a transfer of value that reduces the value of an estate and is typically subject to inheritance tax.

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