10 Things You Might Not Know About Making Gifts
Written by Emma Adkins
Private Client Consultant Solicitor
Most people will give a gift to others during their lifetime, perhaps to celebrate a special occasion or to help a family member. These gifts can be of anything that you own, such as money, shares, property or personal belongings. Whatever the reason and whatever the gift, here are 10 things you might not know.
Different gifts are treated differently for tax purposes
Gifts to individuals are known as potentially exempt transfers. This means that they only have a tax implication if the person giving the gift (the donor) dies within 7 years of making it. However, a gift into a trust has an immediate tax effect, either by using up part of the donor’s inheritance tax allowance (known as the nil rate band), or (if the gift is over the nil rate band or the nil rate band has already been used up) by attracting an immediate tax liability of 20% (rising to 40% if the donor dies within 7 years). Currently, the nil rate band is £325,000.
You are not limited to giving away £3,000 per year
Many people believe that they are only allowed to give away up to £3,000 each tax year. £3,000 is the current annual allowance for gifts, without having any inheritance tax implications. £3,000 is the total allowance per year and not the amount per recipient. This is in addition to the other allowable gifts referred to below. However, if a person gives away over £3,000 in one tax year, either to one individual or several individuals, there may not actually be a negative tax effect. The basic position is that anything over £3,000 given away in a tax year can be brought back into account for inheritance tax purposes if the donor dies within 7 years of making the gift. If the donor survives for at least 7 years after making the gift, then the value gifted is completely outside of the donor’s estate for inheritance tax purposes. This means that if someone makes a gift of £20,000 and dies one year later, they have made £17,000 worth of gifts in excess of their annual allowance. When calculating the inheritance tax due on their estate, the £17,000 is added on to the value of the remainder of the estate. If the total is still below the inheritance tax thresholds, there is no real tax effect of the gift.
Small gifts exemption
In addition to your annual allowance you are also permitted to make gifts of up to £250 per person per tax year, to as many people as you wish, without having an impact on your annual allowance or any other tax implications.
Wedding gifts
You can make gifts on the occasion of marriage or registration of civil partnership. The amount that you can give without having any tax effect depends on your relationship to the couple. Parents can give up to £5,000, grandparents (and great-grandparents) can give up to £2,500, the couple can give each other up to £2,500 and any other person can give up to £1,000. The gift must take place on or before the ceremony and will not have the same beneficial tax treatment if the ceremony does not go ahead.
Regular gifts out of surplus income
If your income exceeds your expenditure, you can make regular gifts out of your surplus income without these gifts having any tax effect. This is in addition to all other allowances. It is sensible to keep a note of your monthly income, expenditure and gifts, as a pattern will need to be established for the tax exemption to apply. There is no maximum amount that can be gifted under this exemption, but it must be clear that the giving of the gifts is from your surplus income and does not affect your usual standard of living.
All gifts made to charities are completely exempt from any tax treatment
Any gifts to charity will not affect your tax allowances or your general inheritance tax position. Also, if you are a UK taxpayer, you can increase the amount received by the charity by making a Gift Aid declaration.
Paying for something for another person counts as a gift
If you repay a debt or a loan owed by another person, or buy something for them, it is still a gift from you to them and is treated in the same way as if you gave them the money directly. Even if you pay a third party, if it is for the direct benefit of someone else, you are making a gift to them. The usual rules and exemptions for gifts will apply.
Capacity
You can only make valid gifts if you have the mental capacity to understand what you are doing, the extent of the gift and the effect it will have on your personal finances. If you do not understand what you are doing or the implications of the gift, it will not be a valid gift. No one should ever try to force you in to giving away your assets and if you ever feel pressured into giving something away, speak to someone you trust. In some circumstances it may be appropriate to involve a solicitor or the police. If you think someone may question your capacity to make the gift, it would be sensible to obtain a written opinion from a doctor confirming that you have the required mental capacity.
A gift must be a gift
For a gift to be effective for inheritance tax purposes (i.e. to start the 7 year countdown of releasing assets from your estate for inheritance tax purposes) it must be a true gift. The donor must not retain any benefit in the asset gifted. For example, if someone gives away their property but continues to live there, they must pay rent to the person they have gifted it to. Otherwise, they are seen to have retained a benefit in the asset (by living in the property rent free). Equally, if a person gives away some shares, they cannot continue to receive the dividends for example. If a donor makes a gift but retains a benefit in the asset gifted, the full value of the asset will be included in the donor’s estate for inheritance tax purposes, regardless of how long before death the gift was made.
Deliberate deprivation rules
If a gift is made with the intention of avoiding paying for care fees, or to affect other means-tested benefits, the gift could be disregarded by the Local Authority/Department for Work and Pensions (DWP). This means that when carrying out their financial assessment, the Local Authority/DWP could calculate the donor’s finances as if the gifted asset was still owned by the donor. The donor would still have to pay for their own care/will not receive the means-tested benefits, making the gift ineffective for this purpose.
For some people making gifts can be a useful tool for inheritance tax planning. For others, making small and regular gifts to help family and friends may be a part of normal life.