Gifts: The Art of Giving

Although inheritance tax (IHT) can arise on some lifetime gifts or ‘transfers of value’, the main concern for most is its impact on the estate at death. Gifts made in the seven years before death will also be treated (to some extent) as part of the estate on death, but before that they are likely to be a potentially exempt transfer (PET) and not part of the estate. While having the required effect of reducing future IHT liability, the gift may result in an immediate capital gains tax liability because this applies to disposals, not just sales. If this is an issue, gifts into trust may be a solution, but professional advice will normally be required on this because the order of gifts to individuals and trusts can affect future liabilities. However, as well as charitable donations, some gifts are not taken into account at all and are exempt from IHT.

Gifts Below Specific Amounts

An individual may make gifts of up to £3,000 a year exempt from IHT, and if the previous year’s exemption was not used, this can be brought forward to the following year, but no further. So, a person who did not make any gifts in the previous tax year could make exempt gifts of up to £6,000 in this year. A spouse or civil partner would have their own exemption, so a couple could gift £6,000 (or £12,000 if no gifts were made in the previous year). However, note that the annual exemption cannot reduce the IHT liability on the estate at death. Gifts of up to £250 to any individual are exempt from IHT, but this does not apply to exempt parts of a larger gift.

Gifts to a Spouse or Civil Partner

Unless the recipient is not domiciled in the UK, the whole of a gift to a spouse or civil partner is exempt from IHT. This does mean that the recipient’s estate is increased with potential IHT implications on their death. However, if the donor is the first to die, any unused nil-rate band of theirs can pass to the spouse, which may mitigate that liability. When considering whether to transfer assets to a spouse or to children, consideration should be given to the type of asset and whether other reliefs (e.g., business or agricultural property reliefs) might be better used to facilitate gifts to future generations.

Gifts in Consideration of Marriage

Gifts that are made or promised before a wedding or civil partnership and are conditional on that event taking place are exempt, with the exemption depending on the relationship to the bride, groom or civil partner. For a parent, the limit is £5,000; for a grandparent or great-grandparent, £2,500; for a future spouse or civil partner, £2,500; and for anyone else, £1,000.

Gifts Made As Normal Expenditure of Out Income

An exemption that is perhaps not so well known is for gifts made as part of a person’s normal expenditure. To be effective, the donor must show that gifts are made from surplus, after-tax income rather than capital and that they retain enough income to maintain their usual standard of living. Some flexibility is possible, but gifts from income that has been saved for several years (and is therefore now treated as capital) would not qualify for relief. Note also that the exemption is for gifts made as normal expenditure; this might be regular payments such as paying school fees, insurance premiums or other payments that are part of a regular sequence. A one-off gift would not qualify here.

Practical Tip

To be effective for IHT purposes, the giver of the gifted asset should not retain any use of it. For example, giving a painting to someone, but keeping it in the giver’s house will be a ‘gift with reservation of benefit’. Unless a ‘rent’ is paid for that benefit, the asset will remain part of the giver’s estate.