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Everything you should know about gifting and tax

How good is your knowledge of the gifting rules surrounding Inheritance Tax (IHT)?

If you’re a little unsure as to how much you can gift during your lifetime, and to whom, then you’re not alone. A recent study by HM Revenue & Customs (HMRC) has found that a minority of people in the UK are considered ‘gifters’ and that knowledge of the rules governing gifting was also surprisingly low.

Keep reading for a summary of the main findings of this research as well as a refresher of the main IHT gifting rules.

Just 13% of people are ‘gifters’

The HMRC study revealed that just 12% of people reported that they (or they and their spouse/civil partner) had given a single gift of £1,000 or more in the two years prior to being questioned. Even fewer (7%) reported that they had given multiple gifts of at least £250 totalling £3,000 or more.

Overall, HMRC determine that around one in six of us (13%) are considered ‘gifters’.

Who people gave gifts to was related to their stage of life:

  • Older gifters were more likely to give to younger people, and, in particular, their adult children
  • Gifters aged 60 and over were more likely to give to grandchildren
  • Younger gifters (who are less likely to be married or have children) were relatively more likely to give to people in their own age group and friends, partners and siblings as well as parents

Of the people who do give gifts, fewer than half (45%) reported being aware of the IHT rules of exemptions when they gave their largest gift.

Fewer than one in five people said that the IHT rules influenced the gift that they gave, indicating that only a very small proportion of people were motivated to give gifts by the IHT rules. And, among those who did have some knowledge of the IHT rules, the proportion who reported being influenced by the rules was relatively small.

HMRC found that those most likely to be affected by IHT – older people who have substantial wealth or who intend to leave a large inheritance – are much more likely to make gifts, to be knowledgeable about IHT, and to say that it affected their gifting behaviour.

Knowledge of the rules surrounding IHT and gifting is very low

Among those who did make gifts, the HMRC study found that knowledge of IHT rules and exemptions was relatively low and bore little relation to the number and value of gifts given.

Whilst 81% of those surveyed were aware that a donation to a charity or a qualifying political party was an exempt gift, 62% wrongly believed that giving a gift of £1,500 to a niece or nephew in consideration of marriage was exempt.

Additionally, a majority (54%) incorrectly believed that IHT will always be payable on gifts over £3,000 given in the seven years before death.

IHT exemptions can be complicated, so here’s a quick refresher of the main rules surrounding gifting and IHT.

How you can use gifts to mitigate your IHT bill

Gifts to your spouse or civil partner

Married couples and civil partners can pass their estate to their spouse tax-free when they die. The surviving spouse inherits the entire estate without having to pay IHT.

You can also pass on your unused tax-free allowance to your surviving spouse or civil partner.

Remember that gifts to an unmarried partner might incur Inheritance Tax.

Gifts that fall within your annual exemption

While you are alive, you have an annual IHT exemption of £3,000 a year. This means that you can gift cash or assets up to this amount in a tax year without it being considered part of your estate for IHT purposes.

Any part of your annual exemption which you don’t use can be carried forward to the following tax year. It can only be used in the following tax year and can’t be carried over any further.

Gifts that are worth less than £250

You are allowed to give as many gifts of up to £250 as you wish (apart from anyone who has already received a gift of your entire £3,000 annual exemption).

None of these sub-£250 gifts are subject to IHT.

Wedding gifts

You can make gifts to people getting married. Remember these must be made before the wedding, and the wedding has to happen. You can gift:

  • £5,000 or less to a child
  • £2,500 or less to a grandchild or great-grandchild
  • £1,000 or less to another relative or friend

Gifts to help with living costs

If you make a gift to help the living costs of an elderly dependent, a child under 18 in full-time education, or an ex-spouse then these gifts might be exempt from IHT.

Gifts from your income

If you have enough surplus income to maintain your lifestyle, you can make gifts from any ‘surplus’ income. For example, you might decide to pay a life insurance premium for your spouse or pay into your grandchild’s savings account every month.

You will need to keep good records of these gifts as the rules for this exemption are complex. Any gifts will need to be regular and so you have to be committed to keeping them up.

Gifting to a charity

Any cash or physical asset you leave to a qualifying charity, either during your lifetime or in your will, is exempt from IHT.

Gifting to a charity in your will can also reduce the rate at which you pay IHT from 40% to 36%. This reduced rate applies if the value gifted to charity amounts to at least 10% of your net estate at the date of death.

Gifting to family and friends

During your lifetime, you can gift as much as you wish to family and friends. To avoid an IHT bill on these gifts, you will need to live more than seven years from when you make the gift. If you don’t live more than seven years after you’ve made the gift, IHT might be due.

When the gift is first made, it is called a Potentially Exempt Transfer (PET), as, assuming you live for a further seven years, there will not be any IHT due on it. If you die within seven years, it’s called a Chargeable Transfer.

This means if you’re thinking about giving away money or assets to your family and friends to reduce IHT, it’s very important you make a record of:

  • What you gave
  • Who you gave the gift to
  • When you gave it
  • How much the gift is worth.

This will make it easier for the executor of your estate to work out during probate what parts of your estate are liable for tax.

Get in touch

Need advice about tax planning or a possible IHT bill? Get in touch. Email hello@sovereign-ifa.co.uk or call 01454 416 653.

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