The Labour government’s first Autumn Budget is creating intense media speculation driven in part by the Prime Minister’s warning that it will be “painful” and “difficult to hear”.
As with many previous Budgets, many of the headline tax changes have been trailed well in advance. We know, for example, that changes to the non-dom regime are planned and VAT will be added to school fees. However, it is the government’s silence regarding potential changes to Capital Gains Tax and Inheritance Tax that concerns wealthy individuals.
Parents and grandparents who already make occasional gifts to their children and grandchildren are now looking to accelerate their gifting to beat the October Budget. Here is what they need to know about the rules on gifting.
Currently, on death, if an individual’s estate exceeds the nil rate band of £325,000 (or £500,000 where the family home is included and the estate meets the criteria for the Residence Nil Rate Band), it will be liable for inheritance tax at 40%. Married couples benefit from a combined IHT threshold of £1m before paying inheritance tax (again, provided the Residence Nil Rate Band criteria is met). These rates have remained unchanged since 2009.
The simplest and easiest way to reduce the size of an estate liable to IHT is through gifting.
All taxpayers can make an annual gift of £3,000 without any IHT implications. If a gift is not made in a tax year it is possible to carry it over into the following year, meaning a gift of £6,000 can be made with no IHT implications.
Additionally, any number of small gifts of up to £250 can be made in any tax year. However, it is important to note that this small gift allowance is per person, meaning an individual can only receive this gift once in each tax year.
Parents and grandparents can make more generous gifts to children and grandchildren when they marry or enter into a civil partnership. Parents can gift up to £5,000 and grandparents up to £2,500. This is in addition to the annual gift allowance but not the small gift allowance.
These gift allowances have remained unchanged for over four decades, meaning their real value, whilst helpful, is much diminished.
Any gifts made over these amounts will trigger the seven-year rule.
This rule means that any gift made seven years or more before death will be exempt from IHT. If the donor dies before the end of that seven-year window a tapered rate of IHT will apply to the gifts.
Gifts out of surplus income
Often overlooked, gifts out of surplus income provide a useful way to make regular gifts of any size without triggering the seven-year rule. The rules are complex but essentially allow regular gifts to be made out of income as long as they do not have any impact on the day-to-day standard of living.
HMRC will take a keen interest in gifts out of surplus income and it is important that these gifts are recorded (along with details of the donor’s annual income and expenses).
Gifting records
Where regular gifts are made over many years, perhaps to help fund school fees or to continue to support a child, this can create a complex IHT tail. Gifts made at different times will, if the donor passes away, attract different rates of IHT or be classed as ‘gifts out of surplus income’.
It is recommended that a record of those gifts is kept, including the dates and amounts given, the details of the recipient together with bank account details. Should the unthinkable happen and the donor passes away, such a record will prove invaluable to the executors of the estate.
A word of warning
Gifts are not of course limited to just cash, and it is not uncommon to gift property to family members. However, if property is gifted but the donor continues to live in or benefit from that property, HMRC may not consider it a true gift. This can apply to valuable jewellery or works of art.
Contact our Private Client Solicitors
If you are in need of advice or assistance on any of the legal issues mentioned in this article, please contact Olivia Meekin, Partner or any member of our experienced Private Client team on 020 7631 4141 or email privateclient@bishopandsewell.co.uk
The above is accurate as at 11 September 2024. The information above may be subject to change.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.
