Gifts Inter Vivos

 

A common approach employed to eliminate an Inheritance Tax liability is simply to decrease the size of an estate before death. Gifts to family members and grandchildren - these will remain tax-exempt as long as the giver lives for seven years after the gift was made.

 

 

 

Of course, there is always the risk that the donor may die within the seven-year period, so the donor will often take out a Life Assurance policy to cover the cost of the tax payable, should they die within that period. This type of insurance is technically known as a 'gifts inter Vivos' policy and it will run for seven years. The policy is set up in Trust to ensure that the funds fall outside the donor's estate for tax purposes. The beneficiaries are normally the heirs to the estate.

 

An example of a Gift Inter Vivos plan:

 

A 65 year old female has an estate worth £550,000 in 2007/08. The Nil Rate Band is £300,000 for the current tax year 2007/08. She gifts £250,000 of the estate to her children. The Inheritance tax on this gift on her death for the seven years since she made the gift is detailed below:

 

Number of years survived between gift and death	Percentage of full tax rate payable
less than 3	100%
3 to 4	80%
4 to 5	60%
5 to 6	40%
6 to 7	20%

 

In order to avoid paying a potential tax of £100,000 on the gift made, she takes out a Gift Inter Vivos plan which effectively works like a decreasing plan. The sum assured decreases in line with the decreasing tax liability. The premium on the plan is £42.32 per month guaranteed for the 7 year term.*

 

*Research was done on 13/08/2007.

 

 
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