The festive season is here and with it, many of us will be joining in the spirit of goodwill and the giving of gifts.
For older generations who have accumulated wealth above the Inheritance Tax threshold, Christmas may seem an appropriate time to gift money to younger relatives.
The rules around gifts are complex, and factors including the timing of a gift can impact the amount of Inheritance Tax that is paid. So before you begin a generosity spree, it is worth looking into the rules around gifts…
The law states that small gifts, such as Christmas or birthday presents, made out of normal income, are usually not subject to Inheritance Tax and are known as “exempted gifts”.
In each tax year, a person can give away a total of £3,000 worth of gifts without them being added to the value of one’s estate, which is known as the “annual exemption”. It is a lesser-known fact that any unused annual exemption can be carried forward to the following year. However, this can only be done for one year.
Outside of the annual exemption on gifts, wedding or civil ceremony gifts worth up to £1,000 per person – or £2,500 for a grandchild or great-grandchild and £5,000 for a child – are allowable.
An individual can also give up to £250 in gifts per person to as many people as they wish in a single tax year, provided they haven’t used another exemption on the same person.
The 7-year rule
Many people will be aware of the ‘7-year rule’ around gifts that are given over and above the stated exemptions – i.e. gifts that are over £250 in value and amount to a total of over £3000 throughout a single tax year. The rule dictates that an individual must survive their gift by seven years for the amount to become exempt from Inheritance Tax.
Should an individual pass away before seven years have passed, a calculation of the tax due will be made on a sliding scale. If the death occurs within the first three years, the full 40% Inheritance Tax is due. The rate reduces to 32% between three to four years, then 24% should it have been given in the four to five years before death. If the death occurs within the five to six-year band, 16% is due, which then drops down to 8% for the six to seven-year band.
As gifts that fall outside of the annual exemptions will be of significant value, the amount that will be due in Inheritance Tax may be fairly substantial, and the recipient of the gift will become liable for the tax charge. It is, therefore, important that anyone making such gifts is aware of the rules so they can inform the recipients of the gift(s) of the caveats involved.
Using gifts can be useful for Inheritance Tax planning, particularly with having an up-to-date Will.
For more information on the rules, allowances and exemptions around Inheritance Tax, please contact Rebecca on 01457 761320 or email Rebecca@odonnellsolicitors.co.uk.
Rebecca O’Donnell is Head of Private Client at O’Donnell Solicitors.