What actually is a gift?
We all love to receive a present and giving a present makes you feel good!
A gift is something of value that is given willingly to someone without payment. We can all understand a gift at Christmas or on a birthday; sometimes cash, a voucher or a treat paid for by someone else.
If Granny gives you her wedding ring it’s a gift. If Mum and Dad give you money to help you with a deposit for a house it is a gift, unless they tell you it is a loan and must be repaid. If someone else pays for a holiday for you, pays off a debt for you or pays for your car insurance for example, that’s a gift.
Why does it matter?
Making gifts during your lifetime should not result in any immediate tax liability but it can affect the amount of Inheritance Tax (IHT) payable from your estate when you die. Every person has an IHT individual allowance known as their “Nil Rate Band” (NRB), currently £325,000. IHT is paid at the rate of 40% on the portion of an estate that exceeds your available NRB. IHT is not usually payable if your estate is worth less than the NRB. However, gifts made within seven years of your death can reduce the available NRB.
So, what can I give Inheritance Tax-free now?
- You can give as many small gifts worth up to £250 to as many people as you want;
- You can give a total of gifts worth up to £3,000 each year, known as the annual exemption. You can’t give £3,000 and a smaller gift up to £250 to the same people. If you don’t use your £3,000 exempt amount in a tax year you can add the unused amount to the next tax year but you can only carry forward unused annual exemptions by one year;
- You can give up to £5,000 to your child when they marry; the gift must be made before, not after, the wedding and the wedding has to happen;
- You can give up to £2,500 to a grandchild or great-grandchild when they marry;
- You can give up to £1,000 to another relative or friend when they marry;
- Gifts to help with living costs of an ex-spouse, an elderly dependent or a child under 18 or in full-time education are exempt from inheritance tax;
- You can make unlimited gifts to your spouse or civil partner;
- If you have enough income to maintain your usual standard of living, you can make gifts from your surplus income. To make use of this exemption, it’s very important that you keep very good records of your income, your assets, your living expenses and the amounts and dates of the gifts. This will help your Executors prove to the HM Revenue & Customs that these gifts were made from income that you did not need to cover your living expenses;
- Gifts to UK registered charities are always exempt from IHT regardless of the amount and the timing of the gift.
Many people, as they get older, use this tax free giving to reduce the value of their estate, with the aim of reducing the IHT that their estate might have to pay when they die.
When does a gift affect Inheritance Tax payable by my estate?
If you give away cash or assets worth more than £3,000 in any tax year and none of the exemptions above apply, but don’t live for more than 7 years from the date you made the gift, the IHT liability on your estate may be affected.
Here is an example
Peter gives Paul £50,000 in July 2016 to help Paul buy a flat. Peter did not make any other gifts that year. Sadly, Peter died in March 2017. At his death his estate was valued at £320,000. If Peter had not made any gifts that were not covered by the gift exemptions mentioned above, his estate would have the full benefit of the NRB of £325,000 and would not pay any IHT. When working out the IHT on Peter’s estate the Executors have to take into account the gift to Paul. The first £3,000 of the gift to Paul is exempt because it was covered by the annual gift exemption. £47,000 will be added to the value of Peter’s estate, because he died within 7 years of making the gift. Another way of looking at this is that the £325,000 NRB is reduced by £47,000, the amount of the £50,000 gift that was not covered by the £3,000 annual exempt allowance. Peter’s estate will pay IHT, calculated as follows:
Value of estate at death – £320,000
Add gift to Paul made within 7 years – £50,000
Deduct Annual Gift Exemption – £3,000
Value added to estate to calculate IHT – £47,000
Total: (estate for IHT) – £367,000
Deduct IHT NRB – £325,000
Portion of estate liable to IHT – £42,000
IHT payable by estate at 40% – £16,800
If Peter had made the gift in February 2010, and died in March 2017, the gift would have no IHT implications because it was made more than 7 years before Peter died and does not need to be taken into account. Peter’s estate will have the full NRB of £325,000, and no IHT will be payable.
Lending money which is to be repaid or giving something away but continuing to enjoy it, is not a gift. For example transferring your house to your children but continuing to live in it will not be treated as a gift for Inheritance Tax and the value of the house will be included in the value of your estate on death. Giving money to someone to help them buy a house does not make you a part owner of the house; if you want to make sure the money is paid back to you or you want to receive some of the sale proceeds when the house is sold, you should ensure this agreement recorded in writing. This could be in a ‘Declaration of Trust’ and should be signed by you and the person you are give the money to. You should consider taking legal advice when making a loan and putting in place a Declaration of Trust.
If you lend money but later decide you don’t want the loan repaid or don’t want to receive anything from the sale proceeds in the future, the loan becomes a gift. Keep a written record of the date you decide you don’t want to be repaid or get anything back; that date is the date you make the gift.
If you’re thinking about giving away money or assets, it’s very important you make a record of:
- What you gave;
- Who you gave it to;
- When you gave it;
- How much it’s worth.
This will make it easier for the Executor of your estate to work out how much IHT is payable from your estate.
In most cases no taxes are payable by the person receiving a gift but if you make large gifts and die within 7 years of making the gifts, the people who received the gifts might have to pay some of your estate’s IHT. If you are considering making a large gift you should take advice about the IHT consequences of the gift.
Gifts into Trust
If you make a gift into a Trust during your lifetime, you may need to tell HM Revenue & Customs of the date and value of the gift. Gifts into a Trust can result in an immediate inheritance tax liability, if the gift is of more than the Inheritance Tax NRB. Smaller gifts into a Trust will not usually result in an inheritance tax liability but please seek advice.
Receiving a Gift
When you make a gift, it is wise to get a receipt from the person you give to. Legally a person under 18 cannot give a receipt so it is sensible to obtain a receipt from their parent or guardian. This is also an issue where a gift is made to a disabled and vulnerable person who may not understand the concept of giving a receipt for a gift. A disabled and vulnerable person may not be able to manage their money or assets themselves, and receiving a gift might mean they lose entitlement to means tested benefits.
If the recipient of the gift has appointed an Attorney under a Lasting Power of Attorney, the Attorney will be able to give the receipt and look after the gift. If a Lasting Power of Attorney hasn’t been made, and the disabled person is not able to manage their finances, an application to the Court of Protection will have to be made to appoint a Deputy to manage the money or gifted item. This is a costly and sometimes lengthy procedure. Consider these points when making gifts in a Will as well as lifetime gifts to a disabled and vulnerable person.
Creating a Trust, for example a Discretionary or Disabled Person’s Trust or adding to an existing Trust can be a way of giving financial support to someone who can’t give a receipt or manage money for themselves. The Trustees will manage the money and assets in the Trust and should make sure the person you want to give the assets to can enjoy items or experiences that the Trust provides. However, please seek advice to make sure the Trust is the best one for the personal circumstances of the disabled and vulnerable individual.
It’s also worth noting that if you make a gift of something you have owned for a while, that has increased in value since you started owning it such as a house or a shareholding, giving it away could result in you having to pay Capital Gains Tax on the difference between the value when you first owned it and the value when you gave it away.
For more information on how making gifts might affect your own personal circumstances please get in touch.