Is Now a Good Time to Make a Gift? What to Be Aware of When Making Gifts During Your Lifetime
With the arrival of a new year, many families will be turning their attention to planning for the future.
For some adult children, this may mean looking ahead to purchasing their first home, or getting married. For some parents, this may mean looking to support those significant life events with cash gifted from 'the bank of mum and dad'.
Making such a gift is a big decision for any family to make and it is important that anyone doing so is aware of the tax consequences and any wider implications.
One of the key benefits of making lifetime gifts, beyond financially supporting family members with significant life events, is the reduction in the value of your estate for inheritance tax purposes. In this article we summarise the gifts most commonly asked about by our clients.
Small Gift Allowance
An individual can make lifetime gifts of up to £250 per recipient each tax year, without that gift being brought into account by HMRC for inheritance tax purposes, on their death. This exemption is often used by parents and grandparents when considering birthday and Christmas gifts each year.
Gifts for Weddings or Civil Partnerships
There is a further exemption which can be claimed against gifts for weddings or civil partnerships. The value of the exemption that can be claimed on death will depend upon the relationship of the donor to the recipient of the gift, but broadly speaking:
- parents can give up to £5,000
- grandparents can give up to £2,500
- anyone else can give up to £1,000
It is also possible to claim this exemption on gifts made 'in contemplation of marriage or civil partnership'.
Annual Exemption
In addition to the above two exemptions, each individual has an annual allowance of £3,000 per person, per tax year. If this allowance is unused during any tax year, it can be brought forward ('rolled over') for the following tax year (ie a total of up to £6,000 could be claimed if no lifetime gifting was undertaken in the previous tax year).
Normal Expenditure Out of Income
In addition to the annual allowance, gifts made as part of normal expenditure out of 'surplus' income are also exempt from inheritance tax.
In order to qualify for this particular exemption, the personal representatives of your estate will need to be able to provide evidence to HMRC that there was a 'regular pattern of gifting' out of your surplus income. Whether HMRC will consider the income to be 'surplus' will be determined by a form known as 'schedule IHT403', which can be accessed online and which the personal representatives of your estate would need to complete on your death.
Our advice to clients wanting to undertake this type of gifting, having taken separate and independent financial advice, is to prepare a copy of this form each tax year. This record keeping will help make life easier for the personal representatives when the time comes to submit the claim.
Spouse and Civil Partner Exemptions
Gifts made between married couples and civil partners are also exempt from inheritance tax, irrespective of value, where both individuals share the same country of domicile. Where there is a domicile 'mismatch' however, the exemption is limited to the sum of £325,000.
How Can We Help?
Our Estates, Trusts and Tax Planning team specialise in assisting families with planning for the future.