You might be considering making gifts. Cash gifts can help provide financial
support to the recipient, whilst also mitigating inheritance tax for the
donor’s estate.
Gifts to individuals
Generally, cash gifts to individuals made in the seven years before the
donor dies are not subject to inheritance tax at the date of the gift, but will
be included in the value of the donor’s estate when calculating inheritance tax
after they die.
(Inheritance tax is currently charged at a rate of 40% on assets over and
above an individual’s tax free allowances.)
However, an individual can make as many small cash gifts of no more than
£250 per person per tax year away as they wish and those gifts are not included
in inheritance tax calculations.
If a gift exceeds £250 per person in a tax year, the gift might still be
covered by the £3,000 annual allowance. If an annual allowance was not used the
previous year, it can be rolled forward one tax year only to give a £6,000
allowance in that later tax year.
Gifts to trusts
Generally, gifts to trusts trigger an immediate charge to inheritance tax.
This means that a lifetime gift (one given when you are still alive) made to a
trust might incur a 20% charge to inheritance tax at the date of the gift, if
it exceeds the donor’s available tax-free allowances. If the donor dies within
7 years of the gift, a further 20% charge could apply on death (bringing the overall
rate of tax to the usual 40%).
Regular gifts from surplus income
If an individual has income which exceeds their expenditure needs, they
might qualify for an exemption which applies to regular gifts made from surplus
income. Record keeping is key to this exemption.
Gifts to exempt recipients or gifts of exempt assets
Gifts between spouses/civil partners are exempt from inheritance tax as are gifts
to registered charities.
Business owners and/or agricultural property owners might benefit from inheritance
tax exemptions for gifts of those types of assets. Any donor with assets which
might qualify for these valuable reliefs should take specialist advice before gifting
them.
Gifts on special occasions
Parents can make a gift of £5,000 to a child on their wedding which will be
exempt from inheritance tax even if the parent dies within seven years.
Grandparents can do the same but can only gift up to £2,500. A wedding gift of
up to £1,000 can be given by any individual to another.
Other considerations
It is important to take specialist advice before making significant gifts or
if gifting to trusts or transferring assets which might have other tax implications
(e.g., capital gains tax). There are also complicated rules where the donor has
retained some form of benefit from the asset gifted.
Other factors to be considered include whether the gift might be a
“deliberate deprivation” for care home fee purposes and whether the gift could
result in the beneficiaries of your Will being disadvantaged because your tax allowances
have been applied to lifetime gifts, rather than to your estate when you die.
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