Time to gift?
Considering how to gift is vital when thinking about your long-term wealth strategy. As well as helping others, it can be a practical way to reduce the size of your estate: the key factor for inheritance tax calculations, which is becoming a greater reality for many as home values and inflation rises. As a starting point, although it is good to gift, there are some tax considerations to be aware of. We break down the basics in our easy-to-follow guide.
Inheritance tax: not just a death tax
It is a common misconception that inheritance tax (IHT) is a death tax. It is true that when an individual passes away , they are treated as making a chargeable transfer equal to the value of their assets at the date of death; however, there is a major exception: if you make a lifetime gift, the value of that gift may also be subjected to inheritance tax.
Did you know: the most common chargeable transfer is a gift to a trust? Trusts are useful for protecting wealth and managing your IHT exposure, but they can result in an immediate lifetime IHT charge, so it is worthwhile speaking with a professional to help you understand the bigger picture.
Exempt transfers
The good news is that some gifts can be exempt from IHT:
• You can give away £3,000 each tax year (the annual exemption) and, you can also use any unused allowance from the previous year.
• You can gift up to £250 to any one person in a tax year, as long as you have not used another allowance on the same person
• You can also make a tax-free gift to someone who is getting married or entering a civil partnership. This can be up to:
o £5,000 to your child
o £2,500 to your grandchild or great-grandchild
o £1,000 to any other person
• Gifts out of income – A lifetime gift is exempt from IHT if you as the donor can satisfy HMRC that it constitutes “normal expenditure out of income”. “Normal” in this case means habitual or typical – e.g. a gift that happens every year.
“Out of income” means you as the donor are left with sufficient income after expenses for the year to maintain your normal standard of living.
For example, this exemption would apply if you pay for the life assurance premiums or personal pension premiums of another person, or make regular small gifts of cash as Christmas or birthday presents.
• Gifts to spouses/civil partners – transferring any asset to your spouse or civil partner (either during your lifetime or upon death), is completely exempt from IHT. The exception to this is if you as the donor are UK domiciled and your spouse/civil partner is not. In this instance, only the first £325,000 of the transfer is exempt from IHT but there are options available to extend this.
There can also be capital gains tax (CGT) implications when making lifetime gifts, unless the gift is of cash or an exempt asset (please see below).
Potentially exempt transfers (PET)
If a gift is neither a chargeable transfer nor an exempt transfer, it is classed as a “potentially exempt transfer” (PET). PETs are treated as exempt from inheritance tax while you as the donor are alive, and will only attract IHT should you pass away within seven years of making the gift.
For many, the seven rule is not considered to be an obstacle, and it is a popular form of IHT planning. However, it does pay to be aware of the time requirement, to know when the gift will be considered ‘clear’ of your estate.
Any IHT liability in respect of a failed PET falls on the recipient so, for significant gifts, it is worthwhile letting your donee know of any potential liability.
The nil rate band (NRB) and residential nil rate band (RNRB)
Every person has a nil rate band (NRB) of £325,000. This can be used against lifetime chargeable transfers, PETs which have failed the seven year rule, and against the death estate, prior to an IHT charge.
In certain circumstances a nil rate band can be transferred to a surviving spouse on first death, effectively doubling the value that can be sheltered on their eventual death. These limits can be further extended by the Residential Nil Rate Band where the property transfers to a direct lineal descendent, although these extensions are eroded should your estate exceed £2M.
Capital Gains Tax (CGT) implications of gifting
When considering gifting an asset, be aware that a gift constitutes a disposal for CGT purposes. Unless the asset gifted is specifically exempt (for example, cars), most property other than cash in sterling is considered to be an asset for CGT purposes.
Most individuals have a capital gains tax annual exemption, currently £6,000 but reducing to £3,000 in April 2024. The annual exemption is similar to the personal allowance for income tax in that the first £6,000 of capital gains in the year are not chargeable to CGT. Anything in excess of this may be subject to either 10% and 18% if you are a basic rate or higher rate taxpayer respectively, or where the asset is property, rates of 20% and 28% apply (again, basic and higher rates respectively).
If you did wish to gift an asset, it could be useful to think about gifting assets which do not present a large gain, so as to minimise your potential CGT liability.
In addition, spouses and civil partners can transfer assets between each other at a ‘no gain and no loss’ value (unless you are separated and not living together), without incurring a charge to CGT. So when considering your potential CGT liability, it could be worth transferring an asset to your spouse or civil partner, so that they may include this within their own annual exemption (assuming they are not already using it).
Gifts to charities are treated in the same way, but certain assets can also attract other tax benefits.
Stamp duty land tax, land and buildings transaction tax, land transaction tax
Finally, take care when gifting property, as this could attract the usual property disposal taxes on the donee if the property carries any associated debt. In other words, there is no duty where there is no outstanding mortgage on the property, but will become due if there is an existing mortgage and the value of the mortgage is over the Stamp Duty Land Tax (or equivalent) threshold.
Tax and legislation is complex and should always be considered carefully, talking all your details into account.
At Independent Women, we are here to make your financial future clearer, to help you see your options regarding gifting and much more. We would be delighted to speak with you and help you to create a plan which works for you. To find out more, please contact us for an introductory discussion with our expert team.
Content on this page is provided for general information and is subject to change and does not constitute advice.
If you would like to know more for your own situation, please do not hesitate to contact us.
We would be delighted to discuss this with you in more detail, taking your circumstances into account.
