Clare Harris

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Gifting at Christmas

Wealth Preservation / 17 December 2018

Are you feeling generous this Christmas? Giving away all of your assets in your lifetime may not be a sensible idea, but with some careful planning you may be able to make some gifts which could reduce your inheritance tax (‘IHT’) liability.  We are often asked about the rules relating to lifetime gifts and how these can be best utilised.

Gifts to your spouse or civil partner, qualifying charities or political parties are exempt from IHT, whatever the amount.  The following are some additional useful exemptions.  They do not use up any of the IHT nil rate band (currently £325,000) and there is no need to survive seven years (unlike an outright gift).

Gifts out of income

Surplus income can be gifted provided you can show:

  1. it forms part of your normal expenditure (i.e. you must be able to show a pattern of giving);
  2. it is income and you are not using your capital to live on; and
  3. you are left with enough income to maintain your ‘usual’ standard of living.

This exemption can also be applied to gifts made to lifetime trusts, such as a discretionary trust.  Trusts can be useful if you wish to give money away but want to retain some control over the funds.

Annual exemption

You can give away assets or cash up to £3,000 each tax year (6 April to 5 April) without the value being liable to IHT.  This is known as your ‘annual exemption’.

If the previous year’s allowance is unused, it can be carried forward for one year only to provide a total of £6,000 in the current tax year.

Small Gifts

You can gift up to £250 each to as many people as you wish in each tax year, but you cannot give more than £250 to any one person.  You cannot make a gift under this exemption to anyone who has benefitted from a gift of your annual exemption.

Weddings or Civil Partnerships

Provided the gift is made before the wedding or civil partnership, each parent may give the couple £5,000; each grandparent and great grandparent may give £2,500; and others may give £1,000.  These gifts are in addition to your annual exemption.

Payments to help with living costs

Each tax year, you can make payments to help with another person’s living costs (such as an elderly relative or a child under 18).

Potentially Exempt Transfer

These are outright gifts (knowns as ‘PETs’) to an individual of any amount which become fully exempt if you survive for seven years.  If you die within seven years, the gift may be considered part of your estate and may be liable for IHT.

Practical steps to take

It is important to keep good records of any gifts you make; when, how much, to whom and the purpose of the gift.  Your executors may need to disclose information about gifts to HMRC.  Failure to do so will result in penalties and interest being charged.

Remember, once it is gone, you cannot ask for it back.  Make sure you consider your own needs and standard of living to ensure you do not give too much away.  You should also consider whether other issues may be relevant to your circumstances, such as the rules around deliberate deprivation of assets for care funding.  If you are thinking about making large gifts, getting advice first will ensure the issues are identified in advance.

To discuss gifting options and estate planning in more detail, please contact a member of the Private Client enquiry team on +44 (0)1733 887675 who will refer you to a legal advisor in a location convenient to you.

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