Gifting money or assets to a loved one is a common way to provide financial support. However, many are unaware of the accompanying tax implications.
The UK tax system includes specific rules on gifting, particularly with regards to Inheritance Tax (IHT) and exemptions. In this guide, we will outline HMRC’s rules on gifting, helping you to make an informed decision before agreeing to offer financial support.
What do HMRC consider to be a gift?
HMRC defines a gift as anything that has value. This includes:
- Money
- Property or land
- Valuable items, such as jewellery or antiques
- Stocks and shares
- The loss of value when you sell something for less than the market price e.g. selling a house to a relative below market value
Understanding the ways in which these gifts are taxed can greatly assist you in planning your finances more efficiently.
Annual Gift Allowance
Each individual in the UK has an annual gift allowance of £3,000, meaning that you can gift up to this amount each tax year without any tax implications. This £3,000 can either go entirely to one person, or can be split between multiple people. This is known as the ‘annual exemption’.
If you don’t use your full annual exemption in one tax year, you are able to carry it forward to the following tax year. However, this benefit can only be used once.
For couples, the annual allowance can be combined, allowing them to gift up to £6,000 per year tax-free.
Small Gift Exemptions
In addition to the annual allowance, you are able to give as many gifts as you like up to the value of £250 per person each year without being subject to IHT, so long as the gift receiver has not received a portion of your £3,000 annual allowance.
It is important to note that seasonal gifts, such as Christmas or Birthday, are entirely exempt from IHT.
Gifts for weddings or civil partnerships
HMRC allows for the giving of larger gifts for weddings or civil partnerships. The amount you can gift is dependent on the relationship to the recipients:
- Parents: gift up to £5,000
- Grandparents or great-grandparents: gift up to £2,500
- Other individuals: gift up to £1,000
It is possible for wedding gifts to be given in combination with other allowances, with the exception of the small gifts allowance.
For example, if your child is getting married, you can combine the £5,000 allowance for wedding gifts with the £3,000 annual allowance to gift up to £8,000.
Making regular payments from surplus income
Regular gifting of money to another person, for example to help with living costs, is exempt from any form of tax, so long as the payment comes from your regular monthly income and is truly surplus in that the gift does not impact your own standard of living.
This is known as ‘normal expenditure out of income’, and can include:
- Paying rent for your child
- Paying into a savings account for an under 18
- Financially supporting an elderly relative
Regular payments can be used in combination with the annual allowance.
For example, you are able to regularly gift £100 per month to your child to assist in rent (a total of £1,200 per year) and still utilise the full £3,000 annual exemption in the same tax year.
Gifts to charities or political parties
Any gift made to UK-registered charities or qualifying political parties are completely exempt from IHT.
Potentially Exempt Transfers (PETs)
If a larger gift to an individual exceeds your annual exemption, it is considered a Potentially Exempt Transfer (PET). PETs are free from Inheritance Tax as long as you survive for seven years after making the gift. This is known as the ‘7-Year Rule’.
It is important to note that this section refers solely to gifts to individuals, which are classified as PETs. Gifts into a discretionary trust are considered Chargeable Lifetime Transfers (CLTs), and are subject to a different set of rules.
If you die within seven years of making the gift to an individual, the gift may be subject to IHT, with the rate of taxation dependent on when the gift was made relative to your passing.
Gifts given within the three years leading up to your death are taxed at the full IHT rate of 40%.
Gifts given three to seven years prior to your death are subject to ‘taper relief’ – effectively a slowly reducing scale of taxation.
It is important to note that taper relief only applies if the total value of the gift given in the 7 years preceding your death is over £325,000.
| Years between gift and death | Tax rate on gift |
|---|---|
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 or more years | 0% |
Capital Gains Tax (CGT) on gifts
For the most part, gifts are primarily considered under IHT rules. However, Capital Gains Tax (CGT) may apply when gifting certain assets; most commonly property or shares.
When these assets are gifted to someone other than a spouse or civil partner, CGT may be due on the amount between the value of the asset when initially acquired and the value of the asset when gifted.
Annual allowance for CGT is currently set at £3,000, meaning that CGT is paid on any amount above this. The rate of CGT for basic rate taxpayers is currently 18%, while higher and additional rate taxpayers will pay CGT at a rate of 24%.
For example, if a house was bought at £100,000, but is valued at £120,000 when gifted, CGT may be due on the £20,000 growth in value, or on £17,000 if the full annual allowance remains.
It is possible for a spouse or civil partner to transfer assets without triggering CGT charges, but gifts to children or other family members may be subject to tax.
Keeping records of your gifts
To avoid any unnecessary tax bills or complications, it is advisable to keep careful records of all gifting, including:
- The value of the gift
- The date the gift was given
- The name of the recipient
- Whether the gift was given from income or capital
- Any expectations applied
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
Contact us today
Understanding HMRC’s gifting rules can help you plan your finances effectively, but tax regulations can be complex. Seeking professional financial advice can ensure you maximise tax efficiencies while supporting your loved ones.
At Cooper Associates Wealth Management, we specialise in tailored financial planning, helping you make informed gifting decisions while minimising tax liabilities. Get in touch today to discuss how we can support your estate planning goals.
FAQs
1. Can I give my house to my children to avoid Inheritance Tax?
Yes, but if you continue living in the property without paying market rent, HMRC will still consider it part of your estate for IHT purposes. This is termed as a ‘gift with reservation’.
2. Do I need to report gifts to HMRC?
Generally, no, unless Inheritance Tax is due. However, keeping accurate records is recommended in case HMRC needs proof.
3. What happens if I give more than £3,000 in a year?
Anything above the £3,000 annual exemption is considered a Potentially Exempt Transfer (PET) and could be subject to Inheritance Tax if you die within seven years. This annual allowance also covers CLTs.
For personalised advice, contact Cooper Associates Wealth Management today.
