If you are planning on giving gifts of cash to loved ones this Christmas, it is important to be clear on the tax implications. Whilst in the UK it is fairly easy to give money away, it is important to bear in mind that some gifts could be subject to taxation by the government. In this post, you’ll discover what you need to know about gift tax ahead of the festive season, including your gift allowance and gifting exclusions, to help you with your financial planning for Christmas.
What is gift tax?
Gift tax is applied when you give something of value. It has the purpose of preventing individuals from avoiding paying Inheritance Tax by reducing the value of estate.
Gifts can be anything of value, including money, possessions and property, as well as assets that are sold under-value.
Are all gifts subject to gift tax?
Not all gifts are taxable; some are exempt. It all depends upon who is receiving the gift, and much it is worth.
For example, you can give your spouse or civil partner as many gifts as you wish without any tax liability for the whole of your lifetime. You can also gift money and assets by leaving them as part of your estate, as a spouse or civil partner is classed as an exempt beneficiary.
It is also possible to gift money and assets to charities, trusts and national organisations without incurring a tax liability, as these are also considered exempt beneficiaries.
Non-exempt beneficiaries fall under an individual’s annual tax-free gift allowance of up to £3,000.
How does the annual tax-free gift allowance work?
Everyone in the UK is entitled to an annual tax-free gift allowance of £3,000. This is known as the ‘annual exemption’. The allowance makes it possible to give away assets or money up to a total of £3,000 without the gift forming part of the estate for Inheritance Tax purposes.
Once the allowance has been exceeded, any gifts may be subject to Inheritance Tax on the event of the gift-giver’s death.
Any unused gift allowance can be rolled over to the following year, but this can only be done once.
Are there any gifts that are exempt from gift tax?
Certain gifts are exempt from gift tax. These include:
- Everyday gifts that are taken out of regular income. These can include Christmas gifts, birthday presents and, in some circumstances, gifts of money to children. To remain exempt from gift tax, once the gift has been given, the giver must be able to maintain their usual standard of living.
- Small gifts of up to £250 during each tax year, providing you have not already given your £3,000 annual gift allowance to the same person.
- Cash given as wedding gifts. Parents may give a gift worth up to £5,000, and grandparents up to £2,500. Other family members and friends can give gifts of up to £1,000.
- Money given with the intention of assisting someone with their living costs. The recipient could for example be a child under the age of 18, or an elderly relative. The money must come from a regular income, and must be affordable.
- Gifts made to political parties are tax-exempt, providing two or more members of the party were elected to the House of Commons, or only one member was elected and the party received a minimum of 150,000 votes.
- Donations to charities and gifts to institutions such as heritage funds, museums and art galleries are exempt from gift tax.
Is the timing of the gift significant?
If you are wondering, how do I gift money without being taxed, it is important to be aware that the timing of the gift is significant. If you give a gift to someone and then survive that gift by seven years or more, then the gift will not form part of your estate for Inheritance Tax purposes.
If however you die within seven years of giving the gift, and it was outside your annual gift allowance, then it will be liable for Inheritance Tax, although the rate at which the tax will be charged will be on a reducing basis over time. This is known as taper relief. The current rates of taper relief can be found here.
How is gift tax paid?
Any Inheritance Tax due on gifts is usually paid by the estate on the death of the gift giver. However, if you give away more than £325,000 in gifts in the seven years before your death, then anyone who gets a gift from you in those seven years will have to pay Inheritance Tax on their gift.
Financial planning for Christmas? For the advice you need, talk to Partridge Muir & Warren.
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