Gifting - Be aware, what you can and cannot do

With Christmas fast approaching many people choose to give cash rather than buy presents. For small gifts, there are no tax implications, but if you are considering gifting a larger sum of money, read on, as there may be inheritance tax liabilities involved. 

Christmas gifts you give from your regular income are exempt from inheritance tax but if you are considering a larger gift or even an early inheritance, there are gifting rules to consider.

What amounts to a gift?

When we think of what constitutes a gift, we usually think of cash or purchasing an item for someone. But in the eyes of the law, a gift can also include selling an item to someone for less than it is worth or giving someone a personal possession, such as a piece of jewellery. There are also situations where you may believe you have gifted an item, such as your property, but if you continue to benefit from the property by living there, the value of that property will still be considered to be within your own estate.

Lists should be maintained of substantial gifts made during your lifetime to assist the executors of your estate. Details of who received the gift, the date and the value of the gift should be noted and stored with your will. If regular gifts are made from excess income, substantial records need to be retained to confirm all income and expenditure, as these will be able to evidence that the gifts are from additional income from the year, otherwise they may be treated as a taxable gift.

The seven-year rule

If a gift is made and the person making the gift survives a further seven years, the gift will not be considered within the individual’s estate and will not incur inheritance tax. But if the person doing the gifting continues to benefit from the gift in any way, this will not apply.

If the gift is made and the person who has gifted it dies within a period of seven years, the gift will need to be declared within that person’s estate and, depending upon the estate value, this could increase the inheritance tax payment due. 

Every individual has a nil rate band allowance of £325,000, which means that their estate does not incur inheritance tax on the first £325,000 (for married couples there may be additional allowances available.) 

Any gifts use this allowance first, with assets such as property and cash using the remainder of the tax-free allowance. It is possible, therefore, that gifting may push your estate over the tax-free allowance, with inheritance tax charged at a hefty 40%. If the gift is survived by some, but not all of the seven years, the 40% tax value can reduce for each of the seven years the individual survived, but this only applies to gifts in excess of £325,000.

Gifts to members of the immediate family

Gifts to spouses are exempt and assets can be passed between a married couple without any inheritance tax consequences. Gifts to other family members or friends can be made up to £3,000 per tax year. 

This sum is not the amount you can give to each individual but is a total of £3,000 when all your gifts for that tax year are added together. If the previous tax year's allowance was not used, this can also be brought forward. 

A married couple will have an allowance of £3,000 each, which means they can make gifts up to £6,000 per tax year. Consideration should be made as to the name of the bank accounts being used to ensure the correct individual’s allowance is used and that the £6,000 isn’t mistakenly paid from an account in a sole name.

There are additional allowances available if the gift is made as a wedding gift and the value is dependent upon the individual’s relationship to you.

If you are considering any substantial gifting, please get in touch to discuss how this may affect your own individual estate, as there are many factors to take into consideration. 

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