Legal News | 5.02.26

Planning Ahead: supporting loved ones while protecting family wealth

Lifetime gifting to loved ones can be a highly effective tool to mitigate Inheritance Tax (“IHT”) on your death. Outright gifts which do not qualify for an exemption or relief from IHT are known as ‘potentially exempt transfers’. Whilst such gifts are not immediately chargeable to IHT, a charge to IHT only arises if the person making the gift fails to survive the gift by seven years. If they do survive seven years, the gift is fully exempt from IHT (subject to certain anti-avoidance rules).

Risks to consider when making lifetime gifts

It is common for parents to assume that once they have made gifts to their children, those assets are safeguarded even in the event that their child, for example, later faces a financial settlement in a divorce. When considering making sizeable gifts to your children or other loved ones, it is therefore crucial to understand not only the tax position but also potential risks in terms of asset protection. The Family Court has a wide discretion to take gifted assets into account to meet reasonable needs and ensure fairness upon a divorce/dissolution of a civil partnership. A gift can also be treated as marital property if it has become ‘matrimonialised’ through joint use or being mixed with joint assets.

The risks are also pertinent for those who have not yet married or entered a civil partnership. A gift can also become vulnerable where an unmarried child is cohabiting – for example, if the gifted funds are used to purchase a property in which the child lives with their partner.

How can Wansbroughs help?

Our Private Client Team can provide advice on the tax implications of making outright gifts (if that is indeed your chosen route) and prepare the necessary documentation to record any gift. The team work closely with the Family and Divorce Team to ensure that any proposed estate planning delivers asset protection for the long-term. Depending on the circumstances, certain protective measures may be advisable:

• If an individual is to be married/in a civil partnership or they are already married/in a civil partnership, we would recommend putting a nuptial agreement in place. This is a document that sets out how assets should be divided in the event of a divorce (which can include lifetime gifts). Following the Supreme Court’s decision in Radmacher v Granatino, the Court should generally uphold a nuptial agreement that is well-drafted and satisfies several factors (i.e., the agreement is freely entered into, and both parties have full appreciation of its implications).
• For an unmarried couple living together, we would recommend a cohabitation agreement that sets out how property, finances and other matters are dealt with during the relationship and what should happen in the event of separation.

If you are considering making sizeable gifts to your loved ones in the near future and need further advice, please contact the Private Client Team at wealth@wansbroughs.com or the Family Team at family@wansbroughs.com.