Gifts - A Taxing Topic
People are often unsure about how much tax will be payable if they make gifts to friends and family. The simple answer is often none! Here is a quick guide to help you. Remember, if in doubt, ask for advice!
The first thing to make clear is that gifts are not subject to income tax or Capital Gains Tax. So, if you give your son or daughter a large sum to help them out, they will not suddenly get an unpleasant tax bill. Obviously if you sell property or shares to make the cash available you may be face a tax bill yourself – but that has no bearing on the gift itself.
The only tax that may apply to gifts is Inheritance Tax (IHT) but, even then, there are plenty of exemptions:
Gifts between a husband and wife (or civil partners) are completely tax-free assuming both are domiciled in the UK and not legally separated.
Marriage gifts of up to £5,000 from a parent to a child, £2,500 to other relatives and £1,000 to anyone else are exempt.
Gifts of up to £3,000 in total in any tax year are tax-free (the “annual exemption”). You may carry forward this exemption one year if not fully used in the previous tax year.
Any small gifts of up to £250 each are tax-free.
Any gifts made from surplus income which do not reduce your standard of living are tax-free. You cannot, however, give away income and simply live off capital – this would not qualify.
Any other gifts made to individuals are known as “Potentially Exempt Transfers” (PETs for short). These gifts will still be treated as part of your estate for IHT purposes if you die within seven years. After seven years the gift becomes exempt and no tax will ever be payable.
The first £325,000 of an individual’s estate is exempt from IHT (the “nil rate band”). An additional “main residence” exemption of £100,000 is being introduced in April 2017. This will increase to £175,000 by April 2020 which will mean a maximum individual IHT exemption of £500,000 or £1 million for a married couple or civil partnership. These exemptions are fully transferable to spouse/civil partner on death.
Many people consider the use of trusts as part of IHT planning. By making a gift to a trust rather than directly to an individual the settlor (the person who created the trust) is able to retain control of the gift (but may not benefit from it personally). Gifts to trusts will usually be immediately chargeable to Inheritance Tax but, if the (cumulative) amount falls within the nil rate band, the immediate tax rate will be nil. Like a PET, a gift to a trust will fall out of the settlor’s estate after seven years.
IHT is payable at 40% on death or at 20% on chargeable transfers during your lifetime. Lifetime gifts may benefit from taper relief if the total value of such gifts is greater than the nil rate band.
Like so many financial areas the basics are pretty straightforward but careful planning is always to be recommended.
To discuss further or to arrange a face to face meeting please contact us.