February 03, 2022

Article

Making a gift to family, or even friends, while you’re still alive is a good way to both help your loved ones at a time when they need it and help reduce your estate for inheritance tax (IHT) purposes. What and how much you decide to gift is up to you but, to ensure it's tax-free is important.

For IHT purposes, when a gift is made it’s called a potentially exempt transfer’ (PET). Basically, if you survive more than seven years after you make the gift, then there won’t be any IHT due on death. However, if you die within seven years, the failed PET becomes chargeable and is added to the value of your estate on death. If the combined value of your estate is over your available nil rate band (currently £325k), IHT may be due.

It's worth noting that the IHT due on a failed PET is payable by the recipient of the gift.

Gifts that are given between 3 – 7 years before death do receive some relief and are taxed on a sliding scale, called taper relief, but only after deducting the NRB.

It is therefore better to make PETS as early as possible, to obtain full exemption, particularly where those assets aren’t going to qualify for any IHT reliefs.

Considering the above, it might be worth considering life assurance to meet any liability on a potential failed PET.

It is important to note you cannot continue to benefit from the gift after you give it away. So, if you continue to live in your house rent-free after gifting it to your child, then this would still be regarded as part of your estate and subject to IHT. This is known as a gift with reservation of benefit (GWROB).

Gifts you can make tax-free:

  • Everyone has an annual gift allowance (annual exemption from IHT) of £3,000. Any unused annual exemption may be carried forward for one tax year only
  • Any number of small gifts can be made up to £250 per person
  • Wedding or civil ceremony gifts, if made before the wedding and on the basis the wedding goes ahead
    • £5,000 or less if given to a child
    • £2,500 or less, if given to a grandchild or great-grandchild
    • £1,000 or less, if given to another relative or friend
  • Gifts to your spouse or civil partner
  • Gifts from your own surplus income
  • Gifts to registered UK charities and political parties

These exemptions are per individual, so a couple could potentially make a joint cash gift to their daughter on her wedding of up to £22,000 tax-free, on the basis they had not utilised their annual exemption for this year and the previous tax year.

However, a gift is treated as a chargeable disposal for capital gains tax (CGT) purposes. The gift is treated as if it were a disposal at full market value at the date of gift and, unless the gift is made in cash or another exemption or relief can be claimed, CGT is chargeable.

Although everyone has an annual CGT exemption (currently (£12,300), basic rate taxpayers will pay 18% on gains from the disposal of residential property and 10% on most other assets, whereas higher rate taxpayers will pay 28% on residential gains and 20% on any other assets.

While reliefs, such as gift relief may be available, if it qualifies as a business asset or is occupied for the purpose of agriculture, considering the potential tax implications, it is important to make sure the CGT position is considered.

If the gift doesn’t qualify for CGT gift relief, if there are no IHT implications, an alternative could be to make the gift via a trust. Gifting to trust allows CGT gift relief to be available.

Considering timing, and the life expectancy of the person making the gift, it may be more advantageous to make the gift into trust on death instead. While this would be IHT neutral, the base cost of the gift would obtain a CGT uplift on death, and no CGT would be payable.

As you can see, the timing of making any gifts and the tax implications should be carefully thought through. For that reason, please contact us if you are either intending on making a gift or are concerned about your IHT exposure.



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