Gifts and tax liabilities

For many UK residents, planning for future generations is a necessary part of growing older. Part of that planning inevitably involves how to reduce the amount of inheritance tax (IHT) due on our hard-earned assets. Making gifts is a common way of doing this, but what are the rules around what can be gifted? Here, we take a look at the types of gift and what tax liabilities are associated with them.

Tax-free gifts

Some gifts are always tax free. Those made to a spouse or civil partner, for example, do not incur IHT, and neither do those left to UK-established charities, national museums or universities.

You can also make tax-free gifts to people getting married or entering a civil partnership. Up to £5,000 can be made to a child, or £2,500 to a grandchild or more remote relative.

There are also more general allowances that can be made annually. Gifts of up to £3,000 in total can be made to whomever you choose, as can an unlimited number of gifts of £250. These, however, cannot go to the same person that has received a share of the £3,000 gift.

It’s worth bearing in mind that certain gifts are eligible for Capital Gains tax, if the recipient later sells the asset for more than what it was worth at the time of the decedent’s death.

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Gifts that may be taxable

Some gifts are classified as ‘potentially exempt transfers’ or PETs. If you die more than seven years after these are made, there is no IHT due. Otherwise, one of two things may happen.

In the first scenario, the PET is reassessed and added to any other taxable gifts that have been made in the seven years previous to making the PET. This includes any assets that have been put into trust, meaning that if some assets have been put into trust up to 14 years before death, the tax liability on the PET could be affected. If tax is owed, the recipient of the PET will need to pay.

There is, however, a tapering system that reduces the tax due. Depending on the number of years the PET was made before death, a percentage of the tax owed is deducted.

In the second instance, the PET is added to your estate and taxed accordingly. That means if the PETs, taxable gifts and other assets come to more than £325,000, 40% tax will be charged on anything above that threshold.

Planning for the future

If you’re considering making gifts in order to reduce the amount of inheritance tax paid on your estate, speak to an Inheritance Tax planning advisor today. It’s a good idea to involve your key heirs in the process, so that you all understand the implications of gifts and other assets when it comes to paying tax. Many experts can also provide trustee services for those who wish for guidance in the future.

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