For many individuals in the UK, gifting to children or grandchildren can be a great way to reduce their tax burden.
However, before entering into any gifting arrangement, it is important to understand and give consideration to the various tax implications that come with it.
In this article, we’ll discuss some of the key tax consequences associated with gifting in the UK.
Inheritance Tax implications
In the UK, Inheritance Tax (IHT) is typically payable on estates worth more than £325,000 (the current nil-rate band).
This is unless the individual is also able to use the residence nil-rate band (an additional £175,000 tax-free where the deceased’s residence is passed to a child or grandchild) or has an unused nil-rate band and/or residence nil-rate band transferred to them.
What this means is that, where allowances are available, unused and transferred, an individual could leave an estate worth £1 million and not need to pay any IHT.
In this instance, strategies to reduce the value of their estate are not necessarily required.
Where any maximum tax-exempt amount is exceeded, then IHT will be due at 40 per cent on anything above the threshold.
Individuals concerned about large IHT bills can choose to gift some of their assets or property to children and grandchildren, during their lifetime, in order to reduce their liability.
However, when making these gifts, there are a few things you should take into account:
The first thing to consider is whether any of the gifts qualify for one of the gift exemptions available under UK law.
These exemptions include gifts covered by the annual exemption, gifts out of income, and the small gift allowance.
Gift annual exemption
Each tax year, an individual can gift up to £3,000 without it being taxed as part of your estate. You can also carry forward unused allowance, but only from the previous tax year, taking your tax-free allowance up to £6,000.
Gifts out of income
Gifts out of income can be any value but must follow a regular pattern of giving. Additionally, the individual must be able to demonstrate that gifts are given from ‘surplus’ income – i.e., total income in a year – outgoings and living expenses.
Small gift allowance
An individual can give as many gifts of up to £250 per person as they wish, in each tax year, as long as they have not used another allowance on the same person.
There is also a wedding/civil partnerships gift allowance that you may wish to consider, should this be appropriate.
It is important to understand which exemptions may apply before making any large gifts as this could impact your IHT liability one way or the other.
Another important point when considering making lifetime gifts is that these must be made absolutely and irrevocably – meaning that once you have gifted something, you cannot reclaim it at a later date, nor attach any special conditions to the gift.
You should also bear in mind that even if something qualifies for a gift exemption, it may still need to be reported on your annual self-assessment form.
It is wise to ensure you have reviewed all relevant rules and regulations before proceeding with any large-scale gifting arrangements.
Gifts with reservation of benefit rules
Finally, it’s important to note that certain types of lifetime gifting may fall under ‘gifts with reservation of benefit rules’, which means they are not exempt from IHT and may still need to be declared on your self-assessment form each year.
For example, if you gift a property, but continue to live in it as your primary residence, then this would likely be caught by these rules. As a result, you would still have an IHT liability for any value over your nil-rate band despite having gifted the property away. It’s essential, therefore, that you take professional advice before entering into any complex arrangements.
Incorrect assumptions, or reluctance to seek proper advice, can lead to unfavourable tax consequences further down the line.
Potentially exempt transfers and the 7 year rule
Gifts given that are not covered by the exemptions mentioned earlier on, are classified as ‘potentially exempt transfers’.
This is because there is a condition that must be met, in order for the gift to be exempt from IHT; that the individual doing the gifting survives for seven years after giving it.
If you die within seven years the tax due depends on when you gave the gift. Gifts given in the three years prior are taxed at 40 per cent, whilst gifts given three to seven years prior, are taxed on a sliding ‘taper relief’ scale.
Taper relief only applies if the total value of gifts made in the seven years before you die is over the £325,000 tax-free threshold.
IHT planning support and advice from trusted accountants
Gifting assets or property during your lifetime can offer significant advantages when it comes to reducing your Inheritance Tax burden in the UK – the caveat being that it must be done properly, and in line with all applicable laws and regulations.
Anyone considering gifting as part of Inheritance Tax planning should take professional advice beforehand.
Our tax advisers have many years of experience supporting private clients and wealthy individuals with IHT and estate planning.
To find out more about how we can help you, or to arrange a free initial consultation to discuss your requirements, contact us today.