Giving gifts is one of the oldest and most common ways of showing our loved ones we care about them. Whether it be a birthday, wedding, graduation, birth of a child, school, holiday or any other reason, gifts are often exchanged year-round in families.
Outside of being a show of love and affection, gifts are also useful for other reasons. Gifts can also be a great way to lower the potential burden of inheritance tax as loved ones age. With inheritance tax (IHT) being 40% in the UK, many families are happy to be able to disperse some of the value of their estate to lower the amount of IHT owed at the time of their passing.
Those who want to leverage this method should be aware of the regulations around such gift-giving and should ask themselves these questions to ensure that they are giving and accepting gifts within the bounds of the tax laws.
What is Considered a Gift?
According to the HMRC, any of these items is considered a gift:
- household and personal goods, for example, furniture, jewellery or antiques
- a house, land or buildings
- stocks and shares listed on the London Stock Exchange
- unlisted shares you held for less than 2 years before your death
A gift can also include any money you lose when you sell 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 counts as a gift.
Are All Gifts Taxable?
No. There are many types of gifts that would not be considered taxable. What falls into this category?
- You can gift up to £250 per person as many times as you want to in a year, granted that you didn’t use another allowance on that same person
- Each citizen in the UK has an annual allowance for gifts. This total can be either used for one individual or split between multiple.
- Gifts for weddings and civil partnerships are also exempt up to a certain amount.
- Regular payments to a savings account for a child or to help a family member with living expenses may also be exempt.
Are You Required to Pay Inheritance Tax on Monetary Gifts?
Inheritance tax is not necessarily relevant to all monetary gifts given before the death of a loved one, but it may apply to some gifts. There are rules that determine whether a gift is eligible for an exemption or if it falls under the umbrella of inheritance tax law.
What Are the Tax Implications of Gifts for Married Couples or Civil Partners?
The rules are slightly different when giving a gift to spouses and civil partners at their weddings. In many families, it is traditional to give the new couple a cash gift at the time of the wedding celebration.
What is considered a “small gift”, or a “big gift” varies by family but from the viewpoint of the HMRC, there are limits to what you can give tax-free.
- You can gift £5,000 to your children as a wedding gift.
- For grandchildren and great-grandchildren, the limit is £2,500.
- For any other person, the limit is £1,000.
Are There Annuals Allowance When It Comes to Gifts?
Yes. In the UK, you are allowed to give away a total of £3,000 a year tax-free. This can be given away to a single person or it can be divvied up between any number of people. If the one that has given these gifts dies, these gifts will not be added to the value of the estate, shielding it from inheritance tax.
For those that do not use this allowance, it may be carried forward to the following year, but only for one year.
Can You Give Gifts to Your Children Without Having to Pay Taxes?
If you are looking to give gifts of money to your children and are hoping to avoid them having to pay inheritance tax on that money, it would have to fall under the £3,000 annual exemption rule. If they are getting married, you may also give them additional money as a gift tax-free.
What is a Potentially Exempt Transfer?
A potentially exempt transfer is the title given to a gift or transfer that is within the 7-year window before a person’s death. They are considered potentially exempt while that person is alive because their status as exempt depends upon when that person dies. If they die before 7 tears has passed, it is considered a “chargeable transfer”.
Are There Any Other Exemptions to the Rules?
Yes. If you are helping a family member and making regular payments (years of giving a gift) to help them with living costs, this may be considered exempt. For example, if you are making regular payments to a savings account to help your child or a family member with rent or are putting that money away for a child who isn’t yet 18, you won’t have to pay tax on those payments.
Gifts to political parties and charities are also considered exempt from any type of inheritance tax.
Is the Timing of the Gifts Relevant?
When it comes to gifts given before the death of a loved one, the timing is important. Gifts that are given within the last 7 years of a person’s life may be considered part of that person’s estate and therefore be affected by inheritance tax.
Gifts like this are taxed on a sliding scale. This taper relief looks like this.
- Gifts given 1-3 years before death: 40%
- Gifts given 3-4 years before death: 32%
- Gifts given 4-5 years before death: 24%
- Gifts given 5-6 years before death: 16%
- Gifts given 6-7 years before death: 8%
- Gifts given 7 years or more: 0%
Giving Gifts Tax-Free
Gift giving is a great way to be able to give tax-free gifts to your family and loved ones. By knowing what is exempt and why, you can maximise your gifts and minimise your tax burden, which benefits everyone.