In this article, Rachael Bonner, our Personal Tax Manager discusses the UK tax implications on cash gifts.
If an individual gifts money there is no capital gains implications, but this does lead to Inheritance tax (IHT) implications, which are often missed.
Gifts could decrease your nil rate band (the amount up to which an estate has no IHT to pay) or even form part of the chargeable estate for IHT. However, there are some exemptions families may want to consider, which we have listed below.
Annual Exemption (AE)
Each individual receives an AE of £3,000 per tax year and if the previous year amount was unused this can be carried forward. This gives any one person the availability to gift £6,000 without any IHT implications. This £6,000 can be of a capital nature.
Please note that if investments are sold to fund this gift there may be Capital Gains Tax implications to consider.
Up to £250 per person can be gifted within a tax year to as many people as you would like, but the exemption is per person. “This means that you cannot gift your annual exemption alongside your small gift to the same person”, says Rachael.
Gifts out of income
If an individual has surplus income in the year they can gift this away as a fully exempt gift with no time clock or restrictions on the amount.
Income can include, earnings, pensions, investment income etc. but cannot include capital i.e. sale proceeds from a house.
For the exemption to apply, the following must be adhered to;
- The gifts are from excess income not capital.
- Usual standard of living is maintained.
- The gifts will be seen as normal.
But how do these exemptions apply during the current COVID-19 period?
“Point 3 means that there is an ongoing intention to make regular gifts or there is a recognisable pattern. The pattern of gift can be determined by each individual i.e. monthly, yearly, to the same person etc. There is no time limit on how long payments need to be made as long as there is more than one. They can therefore cover the COVID-19 period”, says Rachael.
When making gifts, Rachael suggests that good record keeping is vital.
“Evidence of commitment is highly recommended so for example set up a standing order. Also, records of the surplus income and gifts out of this must be kept,” commented Rachael.
Potential exempt transfer (PET)
A PET is a transfer made in lifetime that could be exempt if the donor survives 7 years from the date of the gift. There is no limit on how much can be gifted as a PET.
If the donor dies within 7 years of the gift then this will fall back into the estate.
The tax would be tapered provided survival after the gift by a minimum of three years as follows:
|Years between transfer and death||Tax reduction|
|More than 3 but less than 4||20%|
|More than 4 but less than 5||40%|
|More than 5 but less than 6||60%|
|More than 6 but less than 7||80%|
|More than 7||100%|
Gifting is an area where there are many rules and is closely linked with wider inheritance tax planning considerations.
If you would like to discuss any of the details covered in this article or your inheritance tax planning further, please contact our tax team.