You may wish to make a gift of money or property to your family whilst you are alive, and you may wonder what, if any, the financial implications may be. Did you know that some lifetime gifts may still require inheritance tax to be paid on them?
You may wish to gift a property or perhaps a lump sum of money in your lifetime, but it’s important to understand the rules around gift giving and how these may impact the recipient financially if the value of the gift exceeds thresholds or allowances available.
What counts as a gift?
Many people are aware of gifting a property for example, to children during their lifetime. However, inheritance tax rules may apply to a number of different types of gifts including;
- Household and personal goods such as furniture, jewellery or antiques
- House, land or buildings
- Stocks and shares listed on the London Stock Exchange
- Unlisted shares you held for less than 2 years before your death
- Money you lose when you sell something for less than it’s worth i.e., a house to your child for less than its market value.
Who can I give a tax-free gift to?
Gifts to your Spouse or Civil partner
The good news is that there is no tax to pay on gifts between spouses and civil partners.
This means that there is no restriction on the amount you wish you give them during your lifetime as long as they are domiciled in the UK and are legally married or in a civil partnership with you.
Gifts to Qualifying Charities
Lifetime gifts to charities are also exempt from inheritance tax. So, if you are thinking of making a gift to a charity you can have peace of mind in knowing that charity will benefit from the gift absolutely tax-free.
Will I be taxed on birthday gifts?
Gifts of up to £250 to a single recipient will be tax free provided the individual has not already benefited from your annual exemption. Additionally, gifts made from regular income such as your salary or pension will also be tax-free. So, you will not have to worry about tax paid on birthday gifts, if the gift is made from regular income.
How much is my annual exemption?
You will also be able to give away tax-free gifts’ worth up to £3,000 each year. You can decide to use your allowance in one lump sum gift, or you can split this as a gift between multiple people. Any unused portion of your annual exemption can be carried over one tax year, giving you an increased allowance of up to £6,000.
The seven-year rule when it comes to gifts and inheritance tax
In all other cases, as long as you live for 7 years after making a gift, the recipient will not have to pay any inheritance tax once you pass away.
If you pass away within 7 years after making your gift, the amount of inheritance tax paid on the gift will depend on the year the gift was made.
For example, if you give a gift 3-4 years before your death, the rate of tax payable on the gift will be 32%. If the gift is made 6-7 years before your death, the rate of tax payable reduces to 8%. This principle is known as ‘taper relief’. The effect of which is to reduce the amount of tax payable on gifts made up to seven 7 years before death.
This means that the longer you live after making a gift, the less tax there will be to pay. As such, you may wish to have a think about making gifts to friends and family sooner rather than later in order to get a head-start on the 7-year IHT clock.
And don’t forget…
If you give something away but still benefit from it (‘a gift with reservation’) then this will still count as part of the value of your estate when you pass away. A gift with reservation could be a holiday home that you give to your child, but you still use for free on your holidays, or an antique that you give away, but still have on display in your house.
Additionally, if you gift a gift that has increased in value, then there may be some Capital Gains Tax to pay. There’s a lot to think about when giving gifts and the tax implications of doing so.
Are you thinking about making a gift during your lifetime? Our private client team can advise you on how best to mitigate any inheritance tax implications so that your loved ones can simply enjoy their gift without having to worry about paying inheritance tax on it later. If you would speak to one of the team, please call us on 020 8771 5254. We are experts in this area of law and offer a free initial assessment on your legal matter.