Gift Planning

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Gift planning can be a good idea if you give someone a chunk of money while you are alive, as there can be tax due if you die

Some people can find themselves in a situation where they want to give their loved ones money for any number of reasons. Parents might give their children a lump sum of money to help towards a deposit for a house, to help them start up a business or buy a car. What a lot of people don’t realise is the potential taxation that could be due on this if the parents die within 7 years of the date of the money being gifted.

Our expert advisers are here to make sure that your life insurance policy is setup in the right way, to protect your loved ones.

What is Gift Taxation?

When you give someone a gift of money there can be tax due to the UK government, if that person dies within 7 years. This depends upon

The relationship between the person giving the gift and the person receiving it.
The value of the gift.
The date that the gift was given.

Gifts can include quite a few different things too it’s not just money. It can be buildings, shares, furniture, jewellery, and more.

You can give up to £3,000* a year to someone as a gift and this is the current annual exemption level. You can give the full £3,000 to one person, or split it into smaller amounts for multiple people. You can also find that you if you don’t use your £3,000 gift allowance you can carry it over to the next year. This carry forward only lasts for one year.

There also allowances known as small gift allowances and money paid as wedding or civil partnership gifts. There are lots of technical aspects when it comes to taxation and it’s really important to speak to a financial adviser who can help you calculate what this tax could be.

We know many trustworthy financial advisers who can help you to establish the exact amount of insurance that you need for the gift taxation. We are protection insurance advisers and will arrange insurance policies to help protect against the gift taxation.

* as of January 2023

What insurances protect against Gift taxation?

Gift taxation often comes with what is known as the 7 year rule. This means that if you pass away within 7 years of the date of the gift, the person who received it could need to pay tax on the value.

The amount of tax due usually changes overtime with what is known as taper relief. The tax on the gift is*

First 3 years – 40%
Year 3 to 4 – 32%
Year 4 to 5 – 24%
Year 5 to 6 – 16%
Year 6 to 7 – 8%
Over 7 years – 0%

There are two ways that life insurance is usually used to protect the potential taxation on a gift.

Gift Inter Vivos – this is a life insurance policy specifically designed for gift taxation cover. The policy lasts for 7 years and the value of it reduces over time to match the tax amount.
5 Single Life Insurance polices – if you cannot arrange a gift inter vivos policy due to disclosures on your medical application, it can be possible to arrange 5 separate policies that match the taper relief.

There are specific times and places that both of these approaches work well to provide some financial protection for the person that received the gift. Our advisers are here to find the right solution for you.

* as of January 2023

When should I set up Life Insurance to cover the Gift taxation?

When it comes to things like gift planning you ideally want to arrange a life insurance policy as soon as possible. The longer you wait to arrange the policy the more expensive the life insurance is likely to be.

If you take out a life insurance policy at the age of 34, it will be cheaper than if you take it out at 35, because you are a year older. With most life insurance policies you lock the premiums in place so that the price you pay from the start stays the same while the policy is active.

Another thing to consider is that health can change unexpectedly and quite quickly. You might want to wait a few years to set up your life insurance, but it’s a good idea to be mindful that any changes to your health could affect the terms that you are offered.

What else do I need to know?

When you buy a life insurance policy to cover a gift taxation amount you will need to place the policy into Trust. This is a legal document that states who is meant to receive the money from the life insurance policy.

You will need to set it up so that the person you have gifted the money to is named as a Beneficiary of the Trust.

Most life insurance policies in the UK also come with what is known as terminal illness benefit. This is a built in extra that states that if you are diagnosed with a terminal illness and less than 12 months to live, you can apply for the policy to pay out before you die. When you are arranging a life insurance to cover a gift tax it’s really important that the Trust is set up so that a terminal illness payout is paid to your giftee, or your estate will receive the funds.

This last bit has gone into technical jargon and unfortunately it can’t be avoided here. Our advisers will take you through every step of this process and make everything easy to understand, so that you have confidence that the life insurance you take out it will do what you want it to.

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Dr Kathryn Knowles Phd

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This page was written by Dr Kathryn Knowles Phd, an award-winning insurance adviser. To read more about Kathryn please see her bio here

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