Give what you want, avoid tax.
You may be in the position to avoid tax and help out your children or grandchildren, you might be the favorite family member. Your gifts might be given while you’re alive, or might be transferred upon your death. Find out how to successfully give what you want, while avoiding unnecessary taxes.
Avoid Tax-The basics
A U.K. citizen can give up to £3,000 per year with no tax liability. The £3,000 is a total amount, spread among as many people as you wish, and not £3,000 each. The tax year runs from 6 April to 5 April the following year.
You can also give as many tax-free gifts of up to £250 to as many individuals as you like. However, you can’t give this to anyone who has already received a gift under your £3,000 annual exemption, or another exemption.
If you don’t use your full gift allowance in one year, you’re allowed to roll it over to the following year. You’re only allowed to do this once, so you couldn’t roll any allowance you haven’t used over for a second year.
Spouses and partners
You can give your spouse or civil partner as many gifts as you like during your lifetime and these will remain exempt from tax, if these conditions are met: they live in the U.K. permanently and are legally married or in a civil partnership with you.
Charities, trusts and national organisations can also be considered exempt beneficiaries, so any gift made to them will not be subject to tax.
Regular income monthly payments
Cash gifts can be unlimited, as long as they are coming from a regular source of monthly income of yours, and you make regular monthly payments to the recipient. This is a good way to help pay rent for a child or help an elderly relative with their expenses.
You can combine regular monthly gifts with your other annual gifting allowances. For example, you can give a regular monthly amount and a £250 one-off gift. Or make regular gifts alongside a once-a-year gift of £3,000.
If you do this, it’s important that the payments come directly from your income, rather than your savings, and these regular payments must not have an impact on your standard of living. If you did not require the funds, upon death, the executor can apply for “gifts from surplus income” relief, which would eliminate any inheritance tax implications.
If you give a gift and live for at least seven years from the date of the gift, then the gift is called a Potentially Exempt Transfer (PET) and there won’t be any inheritance tax due on it.
If, however; you die within seven years of making the gift, it becomes a Chargeable Transfer. The amount of tax depends on the number of years between the gift and your death. This is known as taper relief. Taper relief only applies if the total value of gifts made in the seven years before you die is over the £325,000 tax-free threshold.
Note that if you give away more than £325,000 in gifts in the seven years before your death, anyone who gets a gift from you in those seven years will have to pay inheritance tax on their gift.
Years between your gift and death Tax rate
- Less than 3 years 40%
- 3 to 4 years 32%
- 4 to 5 years 24%
- 5 to 6 years 16%
- 6 to 7 years 8%
- 7 years or more 0%
Because the inheritance tax is usually paid by your estate – including your property, savings and possessions – your executor will need to document all of the gifts you gave in the seven years before your death. For this reason, you should keep the following records:
- what you gave and who you gave it to
- the value of the gift
- when you gave it
It’s important to know that even if your gift is exempt from inheritance tax, any income or gains arising from it could have other tax implications for your children, for example, capital gains tax.
Each tax year, you can give a tax-free gift to someone who is getting married or starting a civil partnership. You can give up to:
- £5,000 to a child
- £2,500 to a grandchild or great-grandchild
- £1,000 to any other person
If you choose, you can combine this with your £3,000 annual gift allowance (if you haven’t already used it), meaning you could give up to £8,000 tax-free. Note that you cannot combine the wedding gift with the small gifts allowance of £250.
A gift can also include any money you lose when you sell something for less than it’s worth. For example, if you sell your house to your child for less than its market value, the difference in value counts as a gift. Also, you cannot keep an interest in the gift. If you transfer your home to your child but continue to live in it, it will still be viewed as part of your estate and will be subject to inheritance tax.
If your children or grandchildren inherit your home when you die, the tax-free threshold rises by £175,000, for a total of £500,000 instead of £325,000.
Rising house prices mean an increasing number of people are coming under the inheritance bracket, so if you’re considering gifting a property to reduce the value of your estate, it’s vital to discuss it with a financial adviser to ensure you follow the correct procedure.
To avoid tax keep an eye on tax legislation: the 2022-2023 gifting allowances could be replaced by a flat annual allowance of £30,000, with any cash gifts above this limit liable for a 10%.
Bear in mind, it is usually acceptable to avoid tax using well-known allowances. Using more complex methods to avoid tax may cross the line into tax evasion- with the inevitable consequences!
For more information: https://www.gov.uk/inheritance-tax/gifts
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up-to-date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
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