Looking to give cash or other assets to loved ones? Tax implications could have an impact on how much you gift as well as when you do it.
Although income tax is not levied on gifts of cash or other assets, in certain circumstances inheritance tax may be payable.
Inheritance tax is a tax on the property, money and possessions of an individual who has died, and may be payable when the total value of an estate is over £325,000. This could mean that planning is required before gifting cash, property or other assets.
Of course, many gifts are not subject to tax. Here’s how you could make the most of tax-free allowances and ensure that your gifts are tax-efficient.
Gifts that are not subject to tax
Every individual has tax-free allowances when it comes to making gifts. For example:
- Gifts made to your spouse, civil partner or to a UK-registered charity are not subject to tax.
- Amounts given to other individuals that together total less than an annual exemption of £3,000 are tax free. Should the £3,000 annual exemption not be used up in a particular year, it can be carried forward to the next year.
- Wedding gifts are not subject to tax within certain limits: parents are able to gift up to £5,000 per child, and grandparents up to £2,500 per grandchild, while other relatives and friends can gift up to £1,000 without paying tax.
- Small cash gifts of up to £250 per person can be given without paying tax. There is no limit on the number of people to whom they can be given.
- It is possible to gift part of your taxed income for maintenance payments, for example for children under the age of 18 or other dependents, without paying tax. However, doing so must not lead to a deterioration of your standard of living.
- Gifts made seven years or more before an individual’s death are not subject to inheritance tax.
Gifts that may be subject to tax
Any gifts that are outside your allowances and made within seven years of death may be subject to inheritance tax if their total value is over the tax-free threshold of £325,000.
The applicable inheritance tax rate depends on the length of time between when a gift was made and death. For gifts made up to three years prior to death, an inheritance tax rate of 40% is payable. For gifts made between three and seven years prior to death, taper relief is applied. This reduces the inheritance tax rate by 20% for each additional year between when a gift was made and death.
For example, assuming no other gifts have been made, a gift of £500,000 made between three and four years before the date of death would be subject to an inheritance tax rate of 32%. This includes 20% taper relief on the 40% inheritance tax rate. Inheritance tax would be charged on £175,000, since this is the amount above the £325,000 tax-free threshold. Therefore, there would be inheritance tax of £56,000 to pay.
However, if the same gift was made between five and six years before death, it would be subject to an inheritance tax rate of 16%. This includes 60% taper relief on the 40% inheritance tax rate. Inheritance tax would still be charged on £175,000, since that is the amount above the tax-free threshold of £325,000. But it would mean that inheritance tax of £28,000 would be due.
Takeaway: planning your gifts
Any gift can be given in cash, such as through a bank transfer, or by transferring the ownership of assets such as property. Sticking within your allowances each year will avoid tax being due on gifts.
If you are considering gifts that are outside your allowances, it may be prudent to plan them in advance. If you are concerned about inheritance tax, it may be a good idea to gift money or other possessions sooner rather than later. This could mean that there is a better chance of seven years elapsing before death, under which circumstances there will be no inheritance tax to pay.
While making tax-efficient gifts requires a degree of financial planning, doing so could help to maximise the amount that you are able to pass on to loved ones. Although inheritance tax implications may seem complex at first glance, there are a variety of opportunities available to minimise the tax paid on gifts.
