Having more money than you need can sometimes leave you with a difficult quandary – should you gift it or not? This is a question I have been asked numerous times over the past few months.
In a previous blog, http://carpenter-rees.co.uk/blog/the-kids-are-alright/ I talked about this and the fact that people often delayed making gifts due to fears such as giving the kids too much to young, treating the family fairly, or whether they might squander your hard-earned money (and believe me when you grew up in the 60’s in a culture of ‘watching the pennies’, the thought of someone else being reckless with ‘your’ money is certainly not an easy thought).
On the flip side of the coin, delaying making gifts can mean that you could die with ‘too much’ and therefore potentially incur IHT liabilities on your estate. Whilst there are thresholds to ensure that some of the value of your estate is excluded, anything above these thresholds is taxed at 40%. Not only could this result in a significant reduction in the inheritance you leave behind, but the tax due must be paid by the end of the sixth month after an individual has died …. not always an easy task and particularly where a proportion of wealth is tied up in property.
So, if making the decision to gift isn’t difficult enough, as with many things in life, once you’ve made that decision the next steps are not straightforward either; and I’m not just talking about deciding who to gift to, how much, what they will do with it, what happens in the event of a future marriage breakdown, have you left yourself with enough funds, etc. etc. … I’m talking about the HMRC rules which govern Gifts.
There’s usually no Inheritance Tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents. These are known as ‘exempted gifts’.
There’s also no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they live in the UK permanently.
Other gifts count towards the value of your estate.
What counts as a gift
A gift can be:
- anything that has a value, such as money, property, possessions
- a loss in value when something’s transferred, for example if you sell your house to your child for less than it’s worth, the difference in value counts as a gift
You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.
You can carry any unused annual exemption forward to the next year – but only for one year.
Each tax year, you can also give away:
- wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
- normal gifts out of your income, for example Christmas or birthday presents – but, you must be able to maintain your standard of living after making the gift
- payments to help with another person’s living costs, such as an elderly relative or a child under 18
- gifts to charities and political parties
You can use more than one of these exemptions on the same person – for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.
Small gifts up to £250
You can give as many gifts of up to £250 per person as you want during the tax year as long as you haven’t used another exemption on the same person.
The 7-year rule
Any gifts made in excess of the exemptions count as part of your estate for 7 years. Therefore, death within this period may result in inheritance tax to pay. To make this fairer, HMRC introduced a sliding scale known as ‘taper relief’, which sets out the amount of tax due. Gifts given in the 3 years before you die would be charged at 40%, whilst gifts made 3 to 7 years before your death would be charged as follows: –
|Years between gift and death||Tax paid|
|less than 3||40%|
|3 to 4||32%|
|4 to 5||24%|
|5 to 6||16%|
|6 to 7||8%|
|7 or more||0%|
Gifts are not counted towards the value of your estate after 7 complete years have passed from the date of the gift.
As with all financial decisions, gifting is something which requires careful thought. Of course, gifting is not the only option. Another option is to spend more money, or save less. Often clients can be so preoccupied with accumulating wealth and ensuring that they can fund the lifestyle that they require, that they forget to consider the impact of ‘too much’ money. In my previous blog http://carpenter-rees.co.uk/blog/sometimes-spending-brings-a-bigger-return-than-saving/, I talked about how spending money and particularly on ‘life experiences’ can be hugely rewarding. These are all things that we discuss when going through a client’s financial plan.
As I’ve said previously, there is no perfect solution and one of our roles as financial planners is to help clients think through major life decisions. Our experience in dealing with many families and family businesses stands us in good stead. Carpenter Rees will help make sure that the decision you reach is sensible, balanced and meets your personal values & preferences, family circumstances and concerns over inheritance tax. Involving family and helping educate them in financial matters is an area where our involvement makes a difference.