New research from the National Centre for Social Research (NatCen) and the IFS (Institute for Fiscal Studies) indicates that there is a huge lack of awareness of the rules when it comes to gifting. Liability for inheritance tax (IHT) and the risk of making financial gifts without considering the tax side of things can mean that there is a nasty surprise waiting around the corner.
Only 25% of gifters were described as having a ‘working knowledge’ of IHT rules while fewer than half (45%) of gifters reported being aware of IHT rules or exemptions when they gave their largest gift. However, despite knowing about the tax liability, most respondents did not equate gifting with inheritance tax, and said it did not affect their gifting behaviour. Only 8% of all gifters considered the tax rules before making a financial gift.
It is worth remembering that it is not only IHT but also CGT (Capital Gains Tax) can come into play when making gifts. If, for example, you wanted to gift a property that you had owned for many years and rented out, the CGT could be considerable. You may be wondering how you can make a gain when you have given something away for nothing? It’s because HMRC treat the gift as a disposal for tax purposes and this disposal is deemed to be at a market value. So although you have not received any money in return for you property, you could still end up with a sizable tax bill to pay.
For those who were aware of the IHT rules, 54% said this influenced the value of their largest gift, and on the whole these respondents came from more affluent taxpayers, with assets of £500,000 plus.
Over half (56%) of respondents said they planned to leave an inheritance, with 15% sure they would not, and 29% said they did not know.
When it comes to where the money goes, one in 10 made donations to charity, while the majority of the gifters gave to individuals (80%) with the most common beneficiaries being adult children with over half of respondents giving to this group, while 15% gave to parents, siblings, grandchildren and partners and nearly as many to friends (14%).
So what are the Tax rules when it comes to gifting
Gifts valued at less than £250 individually, totalling less than £3,000 per year, or to help with certain people’s living costs are exempt from IHT. Most gifts made by an individual, to another individual, during their lifetime, will be exempt from IHT unless the donor dies within seven years of making the gift. Such gifts are known as potentially exempt transfers (PETs).
The current starting threshold for IHT for a single person is £325,000, and £650,000 for married couples and civil partners. This group also have the added benefit of the residential nil-rate band which gives them an additional £150,000 each of tax-free property-based inheritance as of 6 April 2019. The allowance is set to rise to £175,000 from 6 April 2020.
This additional tax relief for residences is only available when assets are passed on to children, and was the way the Conservative government kept its pledge to raise the IHT threshold to £1m.
If you should die within 7 years of making a gift, this is called a failed PET and it is taxed on a sliding scale. This means that where the gift was given less than three years before death, tax on the gift is charged at the full rate at 40%, reducing to a taxable rate of 8% if the gift is given six to seven years before death.
With many families facing potentially high care costs for family members, it is important to note that there are very strict rules on property transactions. While a gift given more than seven years before death is not normally counted towards the value of the estate, this is not true where a gift is subject to a reservation of benefit.
This means, for example, if you give away your home to your children and continue to occupy it rent-free, the property is still treated as forming part of your estate, the gift is effectively ignored for IHT purposes, even though your children may be the legal owners of the property.
With so many tax traps to be aware of when making gifts, why not contact us. We can help you plan your giving in a tax efficient way, so you and your family can enjoy the benefits.