Tax Implications of Gifting

Understanding Gifting and Inheritance Tax (IHT): Key Points to Consider

Gifting is the act of giving money or a ‘chattel’ to someone without expecting anything in return. While it's common for people to make gifts to family members, especially on special occasions, there are specific tax rules to be aware of, particularly regarding inheritance tax (IHT). Below are some key points to keep in mind:

1. Annual Exemption

Each tax year, you can gift up to a certain amount without incurring any IHT. As of the last update, this amount was £3,000 per tax year. If you don't use your full annual exemption in a given tax year, any unused portion can be carried forward to the next year, but only for one year.

2. Small Gifts

You can make small gifts of up to £250 to as many individuals as you like, and these gifts are exempt from IHT. However, this exemption cannot be combined with the annual exemption or any other exemptions when gifting to the same person.

3. Wedding and Civil Partnership Gifts

You can give cash or gifts worth up to a certain amount for weddings or civil partnerships without paying any IHT. The current limits are:

• £5,000 for wedding gifts by a parent.
• £2,500 for wedding gifts by a grandparent or great-grandparent.
• £1,000 for wedding gifts by any other person.

The same limits apply to gifts for civil partnerships.

4. Gifts Out of Normal Expenditure

You can make gifts out of your normal income without incurring IHT, provided that these gifts do not affect your standard of living. To qualify, the gifts must be regular (e.g., annual or monthly) and come from income rather than capital.

5. The Seven-Year Rule

If you make a gift and survive for at least seven years afterwards, it will not be counted towards your estate for IHT purposes. However, if you pass away within seven years of making the gift, it may still be subject to IHT.

6. Potentially Exempt Transfers (PETs)

Gifts made during your lifetime that exceed the annual exemption and other allowances are known as Potentially Exempt Transfers (PETs). If you survive for seven years after making these gifts, they become fully exempt from IHT. If you die within the seven-year period, these gifts may be subject to IHT on a sliding scale known as taper relief.

7. Exempt Beneficiaries

Certain gifts to specific beneficiaries are exempt from IHT regardless of when they were made. For instance, gifts to a spouse or civil partner who has a permanent UK domicile are generally exempt from IHT.

Final Thoughts

Gifting is a generous act that often comes from the heart, and because of that, we sometimes do it without considering the tax implications. However, understanding the tax rules surrounding gifting can help you make informed decisions and potentially reduce the IHT liability on your estate.

We are always happy to provide advice and guidance where required to ensure that your gifting plans align with your financial goals and the current tax regulations.

Feel free to contact us if you have any questions or if you'd like to discuss your gifting strategy further.

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