My parents are both in their 70s and have an estate worth around £700,000, including their home and savings. They are considering giving my sister and me £25,000–£50,000 now, rather than leaving it through their wills. Would making these lifetime gifts reduce their potential inheritance tax (IHT) liability, and how does the seven-year rule apply?
Arthur Weller replies:
Putting tax aside, it is always 'better to give with a warm hand than with a cold hand'. However, from a tax perspective, assuming: (a) your parents are married to each other; (b) they have mirror wills in which the first one to die leaves everything to the surviving spouse; and (c) the plan is for the family home to go to the two children after the second spouse dies, then most likely there will be no IHT saving by making lifetime gifts. This is because the combination of two nil-rate bands (i.e., 2 x £325,000) plus two residence nil-rate bands (i.e., 2 x £175,000) covers an estate of £1m, which is a lot more than the current £700,000.
