As this is the season for weddings and there is a trend, apparently, for newly weds to request cash gifts, you should gift freely within the limits if you wish. All taxpayers able to do so should take advantage of their Annual Inheritance Tax Gift Allowance of £3,000 per taxpayer, and if so desired gift money above the Allowance, paying careful attention to the rules and implications of doing so, or make regular payments to children and grandchildren.
Keeping records of gifts given, even those within the allowed Allowance, wedding gifts included, will avoid any confusion. Better still is to contact a financial advisor or accountant, for advice on how to avoid errors and to make this work to everyone’s advantage.
Beginning with the happy occasion of marriage, gifts to married couples or civil partners are exempt from inheritance tax (IHT), but the couple getting married must be UK resident. The amount you can gift is according to your relationship with the couple and the gift must be given either on or before the date of the wedding ceremony.
- Each parent can give up to £5,000 tax-free
- Each grandparent can give up to £2,500 tax-free
- Relatives and friends can give up to £1,000 tax-free
Annual Inheritance Tax Gift Allowance
All taxpayers have an Annual Inheritance Tax Gift Allowance that means money can be given to children, grandchildren, and other relatives without needing to worry about the tax implications. The annual allowance for 2016/17 is £3,000 per taxpayer; a married couple has an annual allowance of £3,000 each. However, as this is the individual’s total allowance for the year it would need sharing out should you intend giving money to multiple recipients. Bear in mind as well that the previous year’s allowance could be used if it hasn’t been used already, giving an individual £6,000 to play with in total without any problems relating to Inheritance Tax (IHT).
You can make smaller gifts without having to pay any tax at all – irrespective of when or to whom you give it. Smaller sums of up to £250 a year can be given to as many people as you like, but it is important to note that you cannot combine the £250 with another allowance. For example, you cannot take advantage of the tax-free IHT Allowance and give one of your children or grandchildren £3,000 plus a £250 small gift.
Potentially exempt transfer (PET)
As regards gifting money above the Allowance, the word “Potentially” is the key, as this implies that if you give a larger cash gift over your Annual Inheritance Tax Gift Allowance, you must live for seven years after making it – known as a “potentially exempt transfer”. Providing you live for seven years after giving the gift then no tax is payable, but otherwise the recipient could be liable for 40% inheritance tax.
When PET is reassessed
If you die within seven years of making the gift, the PET is reassessed and added to any other taxable gifts you made in the previous seven years to see whether any tax is due on the PET itself. This means that gifts made fourteen years before death could be relevant.
While the person who received the PET will be liable to IHT if you die within seven years, the tax due could be reduced due to “taper relief”, but how does this work?
How taper relief can reduce tax due on PETs; If the gift is made
- Less than three years before death, no reduction in tax is due;
- If made three‒four years before death, tax reduced by 20%;
- Four‒five years before death, tax reduced by 40%;
- Five‒six years before death, tax reduced by 60%;
- Six‒seven years before death, tax reduced by 80%;
Should the seven-year running total of taxable gifts and PETs equal less than the tax-free allowance (at the date of death), no tax is due on the PET.
Note, however, that while taper relief could reduce tax on PETs if you die within seven years, it will not reduce the tax due on your estate.
PET added to your estate
If you die within seven years of making a PET, the PET is added to your estate to work out tax due on the estate. If the seven-year running total of PETs, chargeable gifts, and the value of your estate equals less than the unused tax-free Allowance, no tax is due. If most of the tax-free Allowance has been used up against PETs and taxable lifetime gifts, this may mean that there is no Allowance left to use against the rest of the estate.
Regular gifts, given as part of “normal expenditure”
Gifts made as part of your “normal expenditure”, say if you plan to make regular gifts to your children or grandchildren must not reduce your standard of living, should not be from capital, and should be made regularly. A good test is whether the money is paid from your current account.
In this case, it is imperative that an income and expenditure list is maintained so that the executors of your estate can prove the gifts are within the rules. These sorts of gift should be shown as regular payments, with evidence that the payments would continue should you die.
Setting up a trust for your child or grandchild in advance of giving them a cash lump sum may be a good option long term, a financial advisor or accountant such as DNS should be sought to advise you to ensure that everything is in order.
Examples of other tax-free gifting
Gifts between a husband and wife or civil partners who are both domiciled in the UK are tax free; where the transfer is from a party domiciled in the UK to a partner domiciled abroad, only gifts up to £55,000 are exempt, which means anything above that will attract IHT.
Charitable gifts to UK-established charities (i.e. national museums, universities, schools, the National Trust) and certain other bodies as well as gifts to political parties and registered housing associations and community amateur sports clubs are also tax free.
Maintenance gifts from husband, wife or civil partner, ex-husband, ex-wife or ex-civil partner and dependent relatives, i.e. elderly or infirm, are tax free, as are monetary gifts given towards education or training for children (including step- and adopted children) in full-time education or aged 18 or under.
Definitely, taxpayers should take advantage of their Annual Inheritance Tax Gift Planning / Allowance within the limits and gift money above the Allowance, bestow monetary gifts on newly weds, and make regular payments to children and grandchildren to shore up their future if they wish. The key is in paying careful attention to the rules and in keeping accurate records of gifts given to avoid any confusion. An accountant expert in this area will provide assurance that all the rules are met and all the paperwork is in order as well as providing essential tax planning services so that everyone wins.
If you wish to have advice for tax free givings then get in touch with us.