Gift planning and how to manage Inheritance Tax

Alison Clifford

Origen Consultant

Providing financial support to friends and family, such as children or grandchildren, can be very rewarding – especially when you can see the benefits.

For example, helping to provide funds for:

  • a new car may give new found independence,
  • home improvements can help to boost family life,
  • a deposit for a first home can give freedom to a young adult (and their parents!)
  • helping towards costs of further education or additional qualifications can inspire people to follow their dreams and give them the springboard they need to fulfil their potential;

giving you the pleasure of seeing someone you care about benefit from your gift.

Alison Clifford, Origen Consultant in London and South West provides answers to the questions some of her clients have been asking about making gifts.   

How much can I give?

You have an annual exemption for making gifts of up to a total of £3,000 in each tax year. Everyone has an individual £3,000 gift allowance for each tax year. If you haven’t used last year’s gift allowance in full, you can carry forward any unused amount to this tax year, which could give you a maximum £6,000 annual exemption.There is a special additional limit for wedding or civil ceremony gifts of up to £1,000 per person which rises to £2,500 for a grandchild or great-grandchild and £5,000 for a child. 

Gifts up to £250, for example for birthday and Christmas presents etc. are also allowable and will also be tax-free gifts.

In addition to these allowances any gifts which you make out of ‘normal expenditure’ are also tax-free. Many clients have used this ‘normal expenditure’ rule to make gifts from excess income rather than building up unspent income in their estate.

Generally, meeting these requirements can be demonstrated by making a gift which does not impact your standard of living, as your total income exceeds the income required to meet living costs, and they are often regular payments.  Ifthese payments meet these requirements, they will not be subject to the seven year rule relating to PETs and provided the amount is part of ‘normal expenditure’ then you can give away as much additional income as you wish.

If you make gifts in excess of your annual exemption or the £250 gift allowance, then they are classified as potentially exempt transfers (PETs). If you survive for seven years after making the gift, no Inheritance Tax is due on the gift.

Look after your PETs

If you do make a gift, you should keep a record of:

  • What you gave
  • Who you gave it to
  • When you gave it
  • How much it’s worth

These records will help the executors of your estate and protect more of the gifts you have made from being treated as part of your estate and therefore potentially subject to Inheritance Tax.

For a gift which is considered a PET, the taxable amount will be reduced as follows:

Years since gift was made
0-3 years
3-4 years
4-5 years
5-6 years
6-7 years
Over 7 years
Reduction in tax

Any PET will also be added to any other taxable gifts you have made in the seven years before making the PET, including assets put into trust, so any gifts made up to 14 years before death could be included in Inheritance Tax calculations.    

Why are there restrictions?

Everyone has an Inheritance Tax allowance, currently £325,000, which allows assets up to this limit to be passed tax-free on death. When assets are passed to a surviving spouse or civil partner, then regardless of the value, there is no IHT payable.

There arefurther rules around an additional nil-rate band allowance for your main property see our
‘Guide to Preserving your Wealth’.

To stop people avoiding paying Inheritance Tax, these rules and limits apply to the gifts which you make during your lifetime.  

What counts as a gift?

To qualify as a gift – it must be given without reservation, which means that you cannot continue to benefit from the asset which you have gifted. For example, you can’t gift your main residence and then continue to live there rent free. If it does not qualify as a gift then it will be treated as part of your estate on your death.

Managing your income

Whilst making gifts is rewarding, it is important that you do not over commit and leave yourself short in the event of a future unforeseen event/expense.

There are many ways which you can use your income to support others financially now and in the future. Taking the necessary precautions can help to ensure that your gifts remain in the hands of the beneficiaries that you intended and avoid recipients having to incur a tax bill on your death for a gift they received many years ago.

Our Consultants can help you to make gifts to minimise Inheritance Tax liabilities on your death and, if needed, they can also arrange for protection policies to be set up to meet any Inheritance Tax liability.

This article is for information only, based on our understanding of legislation and HM Revenue & Customs practice as at July 2017 and is not to be taken as Financial Advice

CA1411   Exp 07/18

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