The giving season is quickly approaching, and it is a time where family members want to give money and other gifts to their loved ones. Although it’s not the most festive of topics, understanding the tax rules when it comes to giving gifts can be very important when managing your financial affairs.
What Does HMRC Consider a Gift?
It is important to note that money isn’t the only gift you can give - the HMRC consider personal goods, a house, land or buildings, stocks and shares listed on the London Stock Exchange and unlisted shares.
What Is Inheritance Tax and How Does Giving Gifts Affect This?
As a UK resident, you are entitled to your personal tax-free inheritance tax allowance of £325,000, also known as the ‘nil-rate band’. This figure takes into account a person’s whole estate – which is any money (cash and in the bank), the valuation of any property, the valuation of possessions, and the value of any gifts made in the 7 years before death.
If the value of your estate is above the ‘nil-rate band’ of £325,000, inheritance tax is normally paid at a rate of 40%, however exemptions and reliefs can apply. For example, there is no Inheritance Tax to pay if the value of your estate is below £325,000, or you leave everything above that value to your spouse, civil partner, a charity, or a community amateur sports club. There is a further tax-free allowance currently also set at £175,000, known as the “Residence Nil Rate Band” which is available if a person owned their own property and leaves their property to relatives defined as ‘lineal descendants’.
How Does Gifting Affect My Tax Liability?
Each tax year, you can also give away money (or possessions) free of Inheritance Tax, however how much is tax free depends on which allowances you use. The allowances you may be able to take advantage of are listed below:
Tax Allowances - What Can I Gift and to Whom?
To Spouses and Civil Partners
Gifts to spouses and civil partners are generally free of inheritance tax provided that the recipient of the gift is UK domiciled.
To Children and Grandchildren and other family members
You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. You can give gifts or money up to £3,000 to one person or split the £3,000 between several people.
You can give as many gifts of up to £250 cash per person as you want each tax year, as long as you have not used another allowance on the same person. You can also make small, regular gifts out of money on which you have already paid income tax, provided they do not affect your normal lifestyle, and the value of these gifts will not count towards Inheritance Tax no matter when they are given. This includes gifts made at Christmas, birthdays and anniversaries or payments such as insurance premiums or into a savings account.
What is The Annual Exemption for Gifting?
Everyone has an annual exemption which covers gifts made up to the value of £3,000 a year during your lifetime – all or some of which can be rolled over to the following tax year, making it possible to gift up to £6,000 in one year. Any unused annual exemption can be carried forward by one tax year. For example, if you only used £2,000 of your annual exemption in the 2022/23 tax year, you could carry forward £1,000 to the 2023/24 tax year.
Can I Gift Money That Is Over My £3,000 Annual Exemption?
Yes, you can - you can gift as much as you like to your children and grandchildren during your lifetime, and provided you survive at least seven years after the gift is given, no Inheritance Tax will be payable on the value of the gift.
If you wish to gift money to your family, there is no tax is due on any gifts you give if you live for 7 years after giving them (unless part of a trust). If you die within 7 years of giving a gift and there’s Inheritance Tax to pay on it, the amount of tax due after your death depends on when you gave it. Gifts given in the 3 years before your death are taxed at 40% and any gifts given 3 to 7 years before your death are taxed gradually.
If you wish to gift this Christmas and going forwards, keeping the following records will be very helpful for the person who eventually deals with your estate:
- what you gave and who you gave it to;
- the value of the gift; and
- when you gave it.
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About the Author
Molly joined Thornton Jones Solicitors in March 2023 after completing her training contract at Levi’s Solicitors. At time of writing, she is awaiting her Legal Practice Course results which will certify her as a fully qualified solicitor.
Molly studied her Law Degree and LPC at Leeds Beckett and an LLM Masters (Master of Laws) at Leeds University. She joins our Private Client team here at Thornton Jones and brings her experience of working in Private Client and Litigation departments since 2018.
Outside of work Molly admits to her free time being taken up by her Dachshund puppy who causes lots of trouble and is a travelling partner (almost) wherever molly goes. When not tending to her puppy’s needs, Molly enjoys spending time with friends and family.
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