Not every gift you give in your lifetime is going to be subject to inheritance tax. Anything that has a value is counted as a gift for example money, possessions or property. Also, any loss in value of something that is being transferred or gifted counts as a gift, for example selling your property to your children for less than its worth, the difference between the selling price and the market value would be the gift. Therefore, it is important to know what the tax implications are on any gifts you want to give in order to protect your beneficiaries form an unexpected inheritance tax bill after your death.
You have an ‘Annual exemption’ of £3000 this means you can give away up to £3000 worth of assets each tax year that is not liable for tax. Other than your annual gift allowance, each tax year you can also give,
Gifts out of your normal income. For example, birthday or Christmas presents. You can give gifts out of your surplus income as long as your standard of living isn’t reduced by giving it.
Small gifts of up to £250. You can give as many gifts of up to £250 to as many people as you want but not if you have already used another exemption on them. For example, if they have already received a gift of £3000 from you which uses your annual exemption.
Wedding or civil ceremony Gift. The couple getting married can gift each other up to £2500. A parent can give their child up to £5000, a Grandparent can give up to £2500 and anyone else can give up to £1000 as an exempt gift.
Gifts to help maintain another person’s living cost. You can make payments to help with the living costs of an elderly relative or of a child under the age of 18 or in full time education.
Gifts to Charities, museums, universities, or community amateur sports clubs are exempt from tax. Gifts to political parties are also exempt under certain conditions. In some cases, you can use more than one of these exemptions on the same person in the same tax year, for example you can give someone a wedding and a birthday gift in the same year.
Potentially exempt transfer (PET)
Gifts of £3000 or more are known as ‘potentially exempt transfer’ or PET’s. They are called a ‘potentially exempt’ because they are potentially exempt from inheritance tax depending on if you meet certain conditions, the main one being you must survive for 7 years after giving the gift. If you live for 7 years after the gift was given it is exempt from Inheritance tax.
Any gifts of more than £3000 given within 7 years of death will be counted as part of the estate and the value of the gift will be added to the total value of the estate. If your estate, with the gifts included, is worth more than the inheritance tax allowance of £325,000 you will be eligible for inheritance tax.
When is a transfer of assets not considered a gift?
If you give a valuable gift but continue to benefit from that gift, for example continuing to use it in the same way as you did before gifting it, it is no longer considered a gift. Transferring an asset into someone else’s name but not actually giving that asset to them does not constitute as a gift.
In order for a transfer of asset to be considered as a PET the person gifting the asset must not continue to receive any direct or indirect benefit from the asset once it has been given. They can also not revoke the gift, once gifted it must be absolute.
For example, if Person A were to gift their property to Person B, by transferring all or some of the property to person B, in order for it to be a PET, Person A would not be able to continue to live in the property rent free as they had before the gift.
Example of Lifelong gift where inheritance tax would not be due
Person A gifts their property to Person B who then takes on all of the responsibilities of owning a property, e.g utilities, maintenance, insurance etc. If person A was to continue to live in the property, they would have to pay rent to Person B, this would make person A a tenant and Person B the Landlord removing the aspect of direct or indirect benefit.
Example of Lifelong gifts where the exemption fails
Person A transferred ownership of their property to Person B but continued to live in the property as they had before the transfer. Person A continued to maintain the property (utilities, maintenance, insurance etc), made substantial improvements to the property using their own funds and paid no rent to Person B (the named owner of the property), this is called ‘reserving a benefit’. Upon person A’s death the property would be considered as part of their estate as they gifted the property but continued to receive benefit from the property.
Person B would be considered owner of the property in name only, and although a grant of probate would not be needed to transfer the property, the property’s value would be included in the value of person A’s estate. If this were to result in Person A’s estate being over their inheritance tax allowance, their estate would be liable to pay inheritance tax.
If you are concerned about your tax liability when giving a gift it is advised to seek professional advice. If you are the executor of an estate where there are lot of gifts to take into account or inheritance tax to pay speak to a member of our team on 08007318722 or send an inquiry via our webpage.