In the second part of our series, Jonathon Jay of DSW Wealth Planning outlines the rules on gifts. He explains what to watch out for including what’s involved with gifts via a Trust and the other allowances that can apply.
If you gift money or assets to an individual in advance of your death, you could avoid inheritance tax altogether provided you live for at least seven years from the date of the gift. It also means that you can see your loved ones enjoying the benefits while you are still around.
If, however you die within seven years of making the gift, then the recipient would have to pay inheritance tax on any amount that is above the £325,000 threshold. However, the tax payable is subject to taper relief depending on when you die. It is payable in full for the first three years of the gift being made, but after that the amount is reduced by 20% per year until the seven-year anniversary.
Beware that if the gift is in the form of assets – including a second home, jewellery, stocks and shares or cryptocurrencies – then capital gains tax may be payable.
Indirect gifts via a Trust
It is also possible to make a gift to someone indirectly via a Trust, however in this case it may be subject to inheritance tax at the time the gift is made. The general rule is that if the gift exceeds your personal nil rate band of £325,000, then an immediate tax charge of 20% will be payable on the excess with the remaining 20% payable if you die within seven years. Again, the amount payable is subject to taper relief and any tax paid at the outset will also be deducted.
It is important to note that once money or assets are gifted into a Trust, you can no longer benefit so you need to make sure that any gift is affordable and won’t have a detrimental effect on your financial position.
Other allowances
If you do want to make gifts in your lifetime, there are other allowances that apply. Using your annual exemption, you can gift up to £3,000 a year and any allowance that is not used can be carried forward for one tax year.
In the event of a wedding or civil partnerships, you can give up to £5,000 to a child, £2,500 to a grandchild or £1,000 to any other person in addition to your annual exemption.
You can also make regular gifts of any amount provided they come out of your regular monthly income, and you can continue to afford your usual living costs. This is useful for parents who want to support a child who is struggling with the cost of living or help them pay their mortgage.
You can also make small gifts of up to £250 per person to as many different people as you like and all gifts to charity are generally completely free from inheritance tax.
It is very important that you keep records of any gifts you do make in case they are queried at a later date.
The Financial Conduct Authority does not regulate Inheritance Tax Planning, Wills or Trusts.