When meeting clients to discuss putting a Will in place, clients often ask us what gifts they can give their children or grandchildren now preferring this rather than waiting until death. Perhaps because the children or grandchildren could use it now or perhaps they would like to reduce their estate so that they are less exposed to inheritance tax.
There are many factors that should be considered before giving significant sums or assets away and we would recommend that you contact us for bespoke advice tailored to your circumstances before making a such a gift.
This article is highlighting the main considerations before making a gift and what tax exemptions there are available to use.
What you should consider before making a gift
How much can you afford to give away? Once cash or assets have been gifted they cannot be claimed back. You should keep sufficient assets to maintain your standard of living and future requirements.
What should you give away? If you are considering giving away an asset, is there a likelihood you may need this asset in the future? Is the asset worth more now than when you purchased it and therefore, will a capital gains tax liability arise?
How should the gift be made? Should you make the gift direct to an individual (outright gift) or place it in trust for their benefit?
Outright Gifts
This is a simple gift from one person to another with no strings attached. Suitable for modest amounts given to responsible and capable adults to whom they trust to do with as they wish. For example, such a gift could be the purchase of a first car for your children.
Inheritance Tax
The majority of outright lifetime gifts are potentially exempt transfers (PETs). These are gifts from one individual to another and are valid providing the assets transferred become part of the recipient’s estate or the recipient’s estate is increased (for example, a parent paying off a child’s mortgage).
PETs are exempt from IHT if the donor survives seven years. If the donor dies within the seven-year period, the gift becomes chargeable to tax with the recipient liable for the tax due if the value of the gift exceeds the available nil rate band of the donor. Some relief from tax is available if the donor dies more than three years after the date of the gift (taper relief).
Exemptions
A number of exemptions apply to outright lifetime gifts. These include the following:
To a spouse or civil partner who is domiciled in the UK A gift that passes between spouses (or civil partners) either during lifetime or on death is exempt.
A £250 small gifts exemption for lifetime gifts only An individual may make tax-free gifts up to and including £250 (in total) each tax year to any one recipient.
An annual exemption of £3,000 for lifetime gifts only An individual may make tax-free gifts up to the value of the annual exemption (which has been £3,000 for many years). If unused in one tax year, it can be carried forward to the next tax year but if unused in the later tax year it will be lost. Also, the current tax year exemption is always used first.
A gift in consideration of marriage or civil partnership for lifetime gifts only An individual may make tax-free gifts to another person in consideration of that person marrying (or entering into a civil partnership). The amount of the exemption depends upon the relationship of the donor to the recipient of the gift:
- For a parent of the bride or groom, the maximum is £5,000
- For a grandparent (or great-grandparent) of the bride or groom, the
maximum exemption is £2,500
- From any other person, the maximum exemption is £1,000
Normal expenditure out of income for lifetime gifts only A valuable exemption applies to gifts out of surplus income. There is no set amount on the amount that can be given away provided the gift does not exceed the donor’s surplus income. A transfer is exempt if:
- It is made as part of the normal expenditure of the transferor
- It is made out of surplus income (and not capital)
- Taken together with all the transfers that form part of their normal
expenditure, the transferor is left with sufficient income to maintain their
usual standard of living.
If this exemption is used, I would recommend putting some paperwork in place and
preparing annual calculations to demonstrate that the above conditions have been
met.
Other exemptions are gifts to a qualifying charity, registered club, political party, housing associations, gifts for national purposes, a gift for the maintenance and repair of historic building and a gift to employee trusts.
If you would like to make a gift or have concerns about your exposure to Inheritance Tax, please get in touch. We offer a free, no-obligation consultation. Simply email hello@finchtax.com or call us on 0116 216 7681.
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