An unusual question for this weeks’ blog post, but not an uncommon one. A client called to say that he wanted to give some money away to a friend, but was unsure of the tax consequences.
Would the friend have to pay tax on the money? Would the client have to pay tax? Or does the payment fall outside of the tax system?
Straightforward cash gifts between two individuals do not usually attract a tax liability. The theory is that whatever money you have in your bank account has had tax paid on it. For example, your salary will be paid to you after deduction of PAYE/NIC, and if you receive dividends then these will be declared on your self assessment tax return.
Rules are in place to prevent people from giving money away during their lifetime to avoid paying inheritance tax (IHT) when they die. If you give money away and then die within seven years of making the gift payment, then the amount paid will be added to the value of your estate. The value of the gift will reduce (using taper relief) on a sliding scale if the giver dies between 3 and 7 years after the gift was made. If the total value of your estate is above £325,000 (or £650,000 if you are married) then IHT will be due at 40%.
Good news – if you live for at least seven years after the gift is made, then the gift will be exempt from inheritance tax.
Exceptions to the IHT Rule
Not all gift payments fall under the IHT rules noted above.
- Gifts to exempt beneficiaries
You can give as much money away to your husband, wife or civil partner without it affecting IHT.. You can also give money away to charity, museums, or universities. And also political parties with at least 2 members of parliament
- Annual Exemption
You are allowed to give away £3,000 each year, without any tax implications after you die. This is the total amount, and not £3,000 to each beneficiary. You can carry forward the annual exemption for one year if you do not use it in full.
- Small cash gifts
You can make cash gifts of up to £250 to as many people as you like. But you cannot pay a cash gift to someone who may have received a £3,000 Annual Exemption gift as noted in (b).
- Wedding Gifts
You can make a cash gift for a wedding or civil partnership, as long as the gift is made or promised before the ceremony. If the wedding is called off but you still make the gift then it is not exempt for inheritance tax! The exempt amounts depend on your relationship to those getting married
- Parents can give up to £5,000 tax free
- Grandparents can give up to £2,500
- Anyone else can give up to £1,000
How is Inheritance Tax paid on gifts if the giver dies within 7 years?
Anyone who received a gift from the deceased within 7 years of them passing away may need to pay IHT. The amount could reduce because of the taper relief noted above. HMRC will notify you to advise of any amount that is due.
As you can see, giving money away could have unexpected consequences. If you are considering making a gift to a friend or relative then contact Chris or Neil at our office who will be happy to run through the things you should consider.