What is defined as a gift inter vivos?

The term "gift inter vivos" refers to a gift made during the giver's lifetime, as opposed to one made through a will or upon death. In the context of estate planning and taxation, particularly concerning inheritance tax (IHT), a life insurance policy can serve a specific purpose when it comes to gifts inter vivos. If an individual makes a significant gift, this could potentially lead to a liability under IHT if the donor passes away within seven years of making the gift.

A life insurance policy that is arranged specifically to cover the inheritance tax liability on such a gift is a strategic financial tool. The proceeds from this policy can be used by the beneficiary to help pay any resultant tax, effectively protecting the value of the gift from being diminished by tax implications. Therefore, this context clarifies why the answer refers to a life insurance policy as a means of financial protection relating to a gift inter vivos.