Is Christmas, the festival of generosity, an opportune time for financial gifts, like cash, gift cards, or investments?
There are many reasons why an individual may want to make a gift to another individual during their lifetime, whether to help a loved one in financial difficulty, reduce their estate for Inheritance Tax (IHT) purposes or otherwise simply as an act of generosity. A gift can be anything that has value, so as well as money, it can also include personal possessions, property, shares and so on. If you sell something for less than its market value, the difference in value may also count as a gift.
In England and Wales there is no limit to the amount you can give away during your lifetime, however, subject to the amount and timing of your gift, that gift may be counted as part of your estate on your death. If the value of your estate is over £325,000 (the Nil Rate Band), generally the value in excess of that threshold will be charged to IHT, the standard rate of which is currently 40%.
An outright lifetime gift, made with no strings attached, is known as a “Potentially Exempt Transfer” (PET). It is potentially exempt (from IHT), because whether it is counted as part of your estate or not on your death, depends on when the gift was made. If you survive seven years from making the gift, then it will drop out of your estate and be exempt from IHT. However, if you die within seven years of making the gift, it will be counted as part of your estate (although the amount of IHT on the gift can start to reduce after 3 years).
There are a number of IHT exemptions available, which allows you to make lifetime gifts, within certain thresholds, that will be free of IHT and will not be added to the value of your estate on your death, irrespective of how many years have passed:
- Annual exemption: allows you to gift (to either one person or split between several people) up to a total of £3,000 each tax year, free of IHT. If you do not use your £3,000 annual exemption, you can carry this forward one tax year.
- Small gift allowance: allows you to gift up to £250 per person (to an unlimited number of people) each tax year. You cannot use this allowance when making a gift to an individual that you have already used another exemption on.
- Normal expenditure out of income: this is a very useful exemption which allows you to make regular gifts to another individual, free of IHT, as long as the gifting leaves you with sufficient income to maintain your normal standard of living. This exemption is currently uncapped in the amount you can gift.
- Gifts made in consideration of marriage or civil partnership: you can gift up to the following amounts, to someone who is getting married or entering into a civil partnership, and the amounts depend on your relationship with the recipient. You can gift up to:
- £5,000 to a child.
- £2,500 to a grandchild or great-grandchild.
- £1,000 to any other person.
- The gift can be combined with another exemption (but not the small gift exemption), such as the annual exemption to allow you to gift a larger amount.
- Gifts between spouses or civil partners (living in the UK) and gifts to charities and political parties, are also exempt from IHT.
Lifetime gifting can be very rewarding, allowing you to see the impact of your gift whilst you are still alive. However, it is important to review the IHT implications before embarking on any gifting, both to consider if you can make use of the many available exemptions and allowances, as well as to avoid any potential IHT pitfalls (such as when making a gift of something that you still benefit from).
The article is by Emi Page, Senior Associate at Winckworth Sherwood.
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