Whether it is Christmas, birthdays, weddings or graduation, there always seems to be an opportunity to give a gift. However, have you ever thought about the implications making gifts may have when it comes to administering your estate?
- Small gifts of up to £250
For small gifts of no more than £250, there is usually no inheritance tax (IHT) to pay. For example, birthday and Christmas presents of under £250 fall under the umbrella of exempt gifts, meaning that they do not need to be accounted for when calculating IHT in an estate. This exemption cannot be used in addition to the exemptions set out below, on the same person.
- Gifts to spouses or civil partners
Gifts between spouses and civil partners are also considered to be exempt from inheritance tax as long as the spouse or civil partner is a UK resident.
- Gifts out of surplus income
Gifts made out of surplus income are also exempt from IHT (to claim this exemption it is necessary to be able to demonstrate that you can maintain the same standard of living after making the gift.)
Wedding gifts of £5,000 for a child, £2,500 for a grandchild or £1,000 per person for other gifts are also exempt.
- Payments to help with living costs
Any payments you make to help with another’s living costs (such as a child under 18 or an elderly relative) will also be exempt from IHT,
- Gifts to charities or political parties
These will also be exempt.
The annual exemption
It is also important to bear in mind that each person is entitled to an annual exemption of £3,000. In addition to this, if you have not made use of the previous tax year’s (April 6 to April 5) exemption you can carry this forward giving a total £6,000 exemption.
For example if I were to give my brother a gift of £10,000, having made no gifts in the previous tax year, I would be able to utilise the previous year’s exemption as well as this year’s to give a total of £6,000. £4,000 of the gift would be potentially subject to IHT.
Potentially exempt transfers (PET)
Any gifts made within the last 7 years of your life need to be accounted for when calculating your estate’s IHT liability. For gifts which will be subject to IHT, there is a sliding scale with regards to the amount of tax paid from when the gift was made.
For a gift made within three years before death the tax rate is 40%
3-4 years before death the tax rate is 32%
4-5 years before death the tax rate is 24%
5-6 years before death the tax rate is 16%
6-7 years before death the tax rate is 8%
7 years or more then the gift is considered an exempt transfer and there is no need to take the value into consideration when calculating IHT.
It is strongly recommended that if you choose to make gifts that you keep a record of the following:
- to whom you made the gift and their relationship to you;
- the amount and value of the gift at the date the gift was made; and
- the exact date on which the gift was given.
These records will enable your executors to correctly account for the gifts you have made when calculating the IHT due to be paid by your estate, ensuring your estate does not pay any more IHT than is necessary.
Gifts with reservation of benefit
A gift where you still retain an interest in the asset or still benefit from its use, no matter when the gift was made, will not qualify as a potentially exempt transfer.
For example, should you gift your house to your children but continue to live there, then this gift will be taxed as if you still owned the house at the date of your death.
Chargeable lifetime transfers
Certain gifts will be subject to an immediate IHT charge when they are made, such as gifts of more than the inheritance tax nil rate band (£325,000) to trusts.
It is strongly recommended that, if you are in any doubt regarding the tax implications of any gifts you wish to make and/or you intend to gift a substantial amount, you should seek professional advice.