Are gifts taxable, and how much can I give tax-free?
What is Inheritance Tax on Gifts?
- Inheritance Tax (IHT) is generally applied to gifts if the person giving the gift (the “donor”) passes away within seven years of making it. This is because, in the UK, gifts are considered part of an individual’s estate for IHT purposes.
- Threshold for IHT: IHT is charged at 40% on estates over the tax-free threshold of £325,000, which is also known as the nil-rate band.
2. Gifts that are Tax-Free: Annual Exemptions
The UK allows individuals to give away certain amounts tax-free each year, which do not count toward IHT liability:
- Annual Gift Allowance: You can give up to £3,000 per tax year (6 April to 5 April) tax-free. This is known as the annual exemption.
- If you did not use the previous year’s allowance, you can carry it forward, allowing a total of £6,000 tax-free.
- Small Gifts Exemption: You can give up to £250 to any number of people in a tax year, tax-free, as long as the recipient hasn’t received any part of your £3,000 annual exemption.
- Gifts Between Spouses and Civil Partners: Gifts to your spouse or civil partner are generally exempt from IHT, as long as they are both UK residents. There’s no limit to how much you can give to your spouse or civil partner tax-free.
3. Other Exemptions for Specific Types of Gifts
- Wedding or Civil Partnership Gifts: You can give tax-free gifts for weddings or civil partnerships, subject to limits:
- £5,000 to a child.
- £2,500 to a grandchild or great-grandchild.
- £1,000 to anyone else.
- Regular Gifts from Income: If you make regular gifts out of your income (such as monthly contributions), these may be exempt from IHT if they do not impact your standard of living. This is known as the normal expenditure out of income exemption and requires keeping records to show it’s from income, not capital.
4. The Seven-Year Rule for Larger Gifts
- Potentially Exempt Transfers (PETs): Larger gifts that exceed the annual exemptions are known as PETs and may become subject to IHT if the donor dies within seven years of making the gift.
- Taper Relief: If the donor passes away between three and seven years after making a gift, taper relief can reduce the IHT rate on the gift. The amount of relief increases with each passing year:
- 3 to 4 years: 20% reduction in IHT.
- 4 to 5 years: 40% reduction in IHT.
- 5 to 6 years: 60% reduction in IHT.
- 6 to 7 years: 80% reduction in IHT.
- After seven years, the gift is completely exempt from IHT.
5. Gifts and Capital Gains Tax (CGT)
- CGT on Non-Cash Assets: If you gift an asset that has increased in value (like property or shares) to someone other than your spouse, you may be liable for CGT on any gains made up to the date of the gift.
- Spouse Exemption: Gifts to a spouse or civil partner are exempt from CGT, similar to IHT.
6. Summary of Tax-Free Gift Limits
- £3,000 annual exemption, plus any unused portion from the previous year.
- £250 per person under the small gifts exemption.
- Unlimited to spouses or civil partners.
- Wedding gifts: Up to £5,000 to children, £2,500 to grandchildren, and £1,000 to others.
- Regular gifts out of income that don’t affect the donor’s lifestyle.
Understanding these limits can help you make tax-efficient gifts to family and friends, ensuring you can pass on wealth without incurring tax liabilities. For larger gifts or complex situations, consulting with a tax advisor may help in effective planning and documentation.
