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Tax on Gifts

During your lifetime you may well want to help out or treat family members or friends with financial or personal gifts. But there may be tax implications when giving a gift of value, such as property, personal possessions or money.

By taking specialist advice, you can make sure that your gift is given in the most tax-efficient way for both you and the recipient.

Frequently asked questions

Here we answer some of the questions we are often asked about the tax implications of giving a gift.

Generally speaking, a gift can be anything of value, such as cash, personal possessions and property. If you choose to dispose of an asset for less than what it is worth, the difference in value also counts as a gift.

Another type of gift is a ‘gift with reservation’.  This is when you gift something to another person but you still retain some benefit from the gift.  A typical example would be if you gift your home to your children but continue to live there, without paying rent. Generally, gifts with reservation are not effective in reducing your Inheritance Tax (IHT)  liability.

Finally, if a gift is not exempt or potentially exempt, it will be deemed a “Chargeable Lifetime Transfer”. Gifts of this type can trigger an immediate IHT liability (at a rate of 20%).  If you are considering making a gift of this type you should first seek legal advice.

With the exception of Chargeable Lifetime Transfers, IHT is generally only chargeable on death. Your liability for IHT will be calculated based on a snapshot of everything you own at your  death and any gifts made in the seven years before it.  However, not all gifts will be taken into account. Some gifts are exempt and will not form part of your estate for IHT purposes. 

Exemptions

Small gifts: You can make small annual gifts of up to £250 to as many people as you like.  If you choose to do this, be aware that you cannot use this exemption to give more than one gift of up to £250 to the same person in the same year. You cannot give a small gift to someone who has already received a gift from another exemption. Gifting in either of these circumstances could result in your estate being liable for IHT.

Annual exemptione: As well as this, each individual has an annual exemption of £3,000. This first £3,000 worth of gifts you make will not be subject to IHT. If you decide to start making gifts now and you have not used your exemption for the year before, you can carry it forward to double your exemption for the current tax year. However, you can only carry forward an unused exemption for one year,

Other exceptions: Other types of gift which are not liable for IHT and do not use up  your annual exemption are:

  • Wedding gifts of up to £1,000 per person This increases to £2,500 for a gift to a grandchild or great-grandchild, and £5,000 for a child.
  • Normal gifts out of income If you choose to make gifts in this way, to qualify for the exemption you must be able to show a pattern of gift giving, the gifts must be from disposable income and there must be no impact on your standard of living as a result of making the gifts.
  • Payments to help with someone else’s living costs This could be a child under the age of 18 or an elderly relative.
  • Gifts to charities and political parties

Inheritance Tax (IHT) may be payable on any gifts you make that are above the IHT “nil rate band”. The nil rate band is currently set at  £325,000.

The majority of lifetime gifts will be  ‘Potentially Exempt Transfers’ or PETs – so called because if you survive seven years after making them,  they will become exempt from IHT.

If you do not survive the full seven years, the gift will attract IHT, but may benefit from taper relief.

Taper relief is a reduction in the tax payable by your estate on any taxable gifts you made between three and seven years before your death. It works on a  sliding scale basis, and for each year you survive beyond three years, the rate of IHT which is charged on the gift reduces by 20%So, for example , a gift made between three and four years before death will be subject to IHT at the rate of 32%,  whereas a gift made between six and seven years before death will only suffer IHT at a rate of 8%. However, if a gift was made in the three years before death, tax will be due at the full rate.

For further information on gifts and Inheritance Tax, please see our article on the benefits of gifting.

You should also consider Capital Gains Tax, which is payable during your lifetime.

Generally speaking, you may be liable for Capital Gains Tax when you dispose of something you own if the item has increased in value and this increase is greater than the annual exempt amount. This currently stands at £11,700 for individuals. Disposal carries quite a wide definition and includes selling, swapping or gifting an asset.

The following gifts or disposals are exempt from Capital Gains Tax:

  • Disposal of your principal residence
  • Disposal of any chattels which are under £6,000 in value. Chattel is a broad term which includes any physical, moveable assets. This does not include any heritable property or shares
  • Disposals to spouses, civil partners and charities
  • Disposal of any ISAs, UK government gilts or premium bonds or lottery and gambling winnings
  • Disposal of legal UK currency, including gold sovereigns

How can Thorntons help?

Our expert Private Client team can advise you on the tax implications of gifting and help you find the best tax-efficient solution for what you want to give and your individual circumstances.

Call the Thorntons Private Client team on 03330 430150 to find out more about gifting assets and tax planning. Or complete our enquiry form and we will contact you.

Frequently asked questions

Here we answer some of the questions we are often asked about the tax implications of giving a gift.

Generally speaking, a gift can be anything of value, such as cash, personal possessions and property. If you choose to dispose of an asset for less than what it is worth, the difference in value also counts as a gift.

Another type of gift is a ‘gift with reservation’.  This is when you gift something to another person but you still retain some benefit from the gift.  A typical example would be if you gift your home to your children but continue to live there, without paying rent. Generally, gifts with reservation are not effective in reducing your Inheritance Tax (IHT)  liability.

Finally, if a gift is not exempt or potentially exempt, it will be deemed a “Chargeable Lifetime Transfer”. Gifts of this type can trigger an immediate IHT liability (at a rate of 20%).  If you are considering making a gift of this type you should first seek legal advice.

With the exception of Chargeable Lifetime Transfers, IHT is generally only chargeable on death. Your liability for IHT will be calculated based on a snapshot of everything you own at your  death and any gifts made in the seven years before it.  However, not all gifts will be taken into account. Some gifts are exempt and will not form part of your estate for IHT purposes. 

Exemptions

Small gifts: You can make small annual gifts of up to £250 to as many people as you like.  If you choose to do this, be aware that you cannot use this exemption to give more than one gift of up to £250 to the same person in the same year. You cannot give a small gift to someone who has already received a gift from another exemption. Gifting in either of these circumstances could result in your estate being liable for IHT.

Annual exemptione: As well as this, each individual has an annual exemption of £3,000. This first £3,000 worth of gifts you make will not be subject to IHT. If you decide to start making gifts now and you have not used your exemption for the year before, you can carry it forward to double your exemption for the current tax year. However, you can only carry forward an unused exemption for one year,

Other exceptions: Other types of gift which are not liable for IHT and do not use up  your annual exemption are:

  • Wedding gifts of up to £1,000 per person This increases to £2,500 for a gift to a grandchild or great-grandchild, and £5,000 for a child.
  • Normal gifts out of income If you choose to make gifts in this way, to qualify for the exemption you must be able to show a pattern of gift giving, the gifts must be from disposable income and there must be no impact on your standard of living as a result of making the gifts.
  • Payments to help with someone else’s living costs This could be a child under the age of 18 or an elderly relative.
  • Gifts to charities and political parties

Inheritance Tax (IHT) may be payable on any gifts you make that are above the IHT “nil rate band”. The nil rate band is currently set at  £325,000.

The majority of lifetime gifts will be  ‘Potentially Exempt Transfers’ or PETs – so called because if you survive seven years after making them,  they will become exempt from IHT.

If you do not survive the full seven years, the gift will attract IHT, but may benefit from taper relief.

Taper relief is a reduction in the tax payable by your estate on any taxable gifts you made between three and seven years before your death. It works on a  sliding scale basis, and for each year you survive beyond three years, the rate of IHT which is charged on the gift reduces by 20%So, for example , a gift made between three and four years before death will be subject to IHT at the rate of 32%,  whereas a gift made between six and seven years before death will only suffer IHT at a rate of 8%. However, if a gift was made in the three years before death, tax will be due at the full rate.

For further information on gifts and Inheritance Tax, please see our article on the benefits of gifting.

You should also consider Capital Gains Tax, which is payable during your lifetime.

Generally speaking, you may be liable for Capital Gains Tax when you dispose of something you own if the item has increased in value and this increase is greater than the annual exempt amount. This currently stands at £11,700 for individuals. Disposal carries quite a wide definition and includes selling, swapping or gifting an asset.

The following gifts or disposals are exempt from Capital Gains Tax:

  • Disposal of your principal residence
  • Disposal of any chattels which are under £6,000 in value. Chattel is a broad term which includes any physical, moveable assets. This does not include any heritable property or shares
  • Disposals to spouses, civil partners and charities
  • Disposal of any ISAs, UK government gilts or premium bonds or lottery and gambling winnings
  • Disposal of legal UK currency, including gold sovereigns

How can Thorntons help?

Our expert Private Client team can advise you on the tax implications of gifting and help you find the best tax-efficient solution for what you want to give and your individual circumstances.

Call the Thorntons Private Client team on 03330 430150 to find out more about gifting assets and tax planning. Or complete our enquiry form and we will contact you.

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