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    Guide to tax on gifts

    Understanding inheritance tax on gifted assets during your lifetime

    What is a gift?

    Many of us want to support our loved ones with important life’s milestones, such as getting married, going to university or buying a house, and this can be very rewarding. However, there are rules about how much you can give away without any inheritance tax liability on gifts.

    You will also need to ensure that you don’t sacrifice your own quality of life, or give away so much that it’s considered a ‘deprivation of assets’. That’s why we’d recommend talking to a Financial Advisor about tax on gifts.

     

    Talk to an advisor about your Gifts and Estate Planning

     

    What is classed as a gift?

    Giving assets away in your Will would mean these were part of your estate for inheritance tax purposes. Making gifts of them in your lifetime could allows you to enjoy seeing them benefit. Gifts can include:

    • Money (including investments, stocks and shares)
    • Property (any houses or land)
    • Possessions (including art, jewellery and antiques)

    A gift can also include any money you lose by selling something for less than it’s worth. For example, if you sell your house to your child for less than its market value, the difference in value would count as a gift.

    It is possible to leave instructions about how you would like your gifts to be used. ‘Gifts with reservations’, or legal vehicles like Trusts, can be used to add conditions.

     

    Rules on giving gifts

    Gifting can be used to reduce the inheritance tax liability on your estate, but the HMRC has as series of rules. It’s important to keep records of gifts made during your lifetime, and keep the following rules in mind:

    Who does not pay inheritance tax?

    If your estate is worth less than £325,000, then there will be no inheritance tax to pay. This is called the Nil Rate Band.

    There is no inheritance tax to pay on tax between spouses or civil partners. Instead, when the first of the couple dies, their unused Nil Rate Band is transferred to their surviving spouse or civil partner to give a new, combined Nil Rate Band.

    What gifts are excluded from inheritance tax?

    When Gift and Estate Planning, some gifts can be exempted from your inheritance tax calculation. This is a complex area, as the value of gifts and when they are given will need to be taken into account. Understanding estate and gift taxation rules can help reduce the taxable value of your estate and ensure more of your wealth is passed on to your loved ones.

    The rules for gifting as a Power of Attorney

    Attorneys may be able to make gifts on behalf of the donor – but there are strict Power of Attorney gifting rules. If you have a Property and Finances Power of Attorney in place, you will be able to give them this power. The purpose of an Attorney is not to make gifts, but can help preserve relationships between the donor and their friends and family – as long as decisions are made with the donor’s best interests at heart.

     

    How is inheritance tax on a gift paid?

    When someone passes away, it will be up to their Executor to go through the probate process and pay their inheritance tax bill within 6 months.

    If you have received a gift, and the donor has passed away less than 7 years later, then a portion of the gift will need to be considered when calculating their IHT bill. If a gift has been made above the tax-free allowance, then the person who receives the gift is responsible for paying inheritance tax on the gift. If they refuse to do so, or cannot, then the tax is paid out from the estate of the deceased.

    Get inheritance tax advice from Wren Sterling

    Planning ahead can help ensure that more of your money goes to your beneficiaries – rather than the taxman. Your Wren Sterling Financial Adviser can help you work out how much money you will need in future and how you can pass on your assets in the most effective way.

    Get in touch to discuss your options today

    FAQs:

    • What is the seven-year gifting rule?

      What is the seven-year gifting rule?

      No tax is due on gifts as long as you live for 7 years after make the gift. The amount liable to inheritance tax slowly reduces over this time, thanks to this ‘Taper rule’. If you do pass away within 7 years the recipients may have to pay tax on gifts they have received.

    • How much is the annual gift allowance?

      How much is the annual gift allowance?

      The first £3,000 of gifts you make each year will not be subject to IHT. This can be given to one person, or split between several recipients.

    • Are all gifts taxable?

      Are all gifts taxable?

      You can make ‘small gifts’ of up to £250 to as many people as you like each tax year. The recipient of these small gifts should not have received any part of your £3,000 annual exemption. There are also rules for wedding gifts, gifts to charity and gifts that are part of your usual spending habits. Gifts above this amount may eat into your Nil Rate Band.

    • What is taper relief?

      What is taper relief?

      If you die within 7 years of giving a gift and there’s inheritance tax to pay on it, the amount of tax due after your death depends on when you gave it. This will only apply is the gift is worth more than the donor’s £325,000 tax-free allowance.

      Depending on the years between gift and death, and rate of tax on the gift will reduce:

      • 3 to 4 years – 32%
      • 4 to 5 years – 24%
      • 5 to 6 years – 16%
      • 6 to 7 years – 8%
      • 7 or more – 0%

    • Do you pay tax if you gift your partner money?

      Do you pay tax if you gift your partner money?

      There is no inheritance tax to pay on tax between spouses or civil partners. Instead, when the first of the couple dies, their unused Nil Rate Band is transferred to their surviving spouse or civil partner to give a new, combined Nil Rate Band.

    • What counts as a gift?

      What counts as a gift?

      Giving assets away in your Will would mean these were part of your estate for inheritance tax purposes. Making gifts of them in your lifetime could allows you to enjoy seeing them benefit. Gifts can include; money (including investments, stocks and shares), property (any houses or land) or possessions (including art, jewellery and antiques).

    • Are there any reliefs from inheritance tax?

      Are there any reliefs from inheritance tax?

      In addition to the Nil Rate Band, and transferrable Nil Rate Band between spouses and civil partners, you can use the ‘Main Residence Nil Rate Band’ to leave your main residence to a direct descendant (e.g. child) then up to an additional £175,000 (fixed until 2028) can be added to the standard Nil Rate Band. Learn more about this in our article.

    • What is a potentially exempt transfer?

      What is a potentially exempt transfer?

      Potential Exempt Transfers are gifts that fall within the 7 year rule. The amount liable to inheritance tax slowly reduces over this time, thanks to this ‘Taper rule’. If you do pass away within 7 years the recipients may have to pay tax on gifts they have received.