GIFTING AND TAX IMPLICATIONS IN UK
A gift, is the voluntary transfer of cash, tangible things and property from one person, referred as the donor or grantor to another, referred as the done or grantee. A gift is legally effective if it meets three requirements, such as:
- Intent of the donor: The donor of the gift must have a present intent to make the gift to the done and ay promise to make a gift in the future does not hold any ground from legal point of view.
For example, if a man gifts a woman a ring and asks her to hold on to it till her next birthday, does not classify the ring as a gift from legal point of view and he could legally demand the ring back. However, if a man gives a woman a deed with her name and details mentioned on it, in this case his gift to her hold legal value to it and he would be unable to reclaim it.
- Delivery of gift to done: In case the donor keeps a clear intent to gift, for example, a property to the donor, but is not able to deliver the same to the donee, then the gift is not considered as a legal gift.
- Acceptance of gift by done: A gift is considered legally acceptable only if the donee has accepted the gift.
Transfers that qualify as a gift are a usually exempt from various tax laws and gifts can usually be made to persons or to qualified entities, for example to a registered charity. Usually, there are three types of ways that a gift can be transferred:
- Inter Vivos Gift: This is a gift that is transferred during the life of the donor while they are still alive and it is irrevocable i.e. once transferred, donor cannot claim it back.
- Causa Mortis Gift: This is a gift which is transferred in anticipation of imminent death and is usually effective upon the donor’s death and can be revoked up until the donor is alive.
- Testamentary Gift: This is a personal gift distributed through a will and is transferred to the done after the donor’s death and it is also included in the overall distribution of the person’s estate.
As a normal understanding of gifts, it is a gesture of love and as a citizen of a free country one should be able to gift anything, either in cash or kind to the person of his or her choice. However, this is not the case and one need to understand what and how much he or she can gift without having any tax implication on it. Whether you are giving gifts in order to offer them a helping hand to get them onto the property ladder or to provide an income boost, there are inheritance tax implications to it which you should consider. Gift tax is a tax applied to an individual giving anything of value to another person and for something to be considered as a gift, the receiving party i.e. the done cannot pay the giver, i.e. the donor full value for the gift but may pay an amount less than its full value and normally it is the giver of the gift who is required to pay the gift tax.
Having said the above, it is not the case that you cannot giveaway anything as a gift without having tax implication on it. There are several categories of gift which are exempted from the tax but only if they stay within the given allowance. Normally, there is no Inheritance tax to pay on small gifts such as Christmas or birthday presents and these gifts fall under ‘exempted gifts’ category. Also, gifts which you share with your spouse and civil partner have no tax implications on it, provided you and your spouse or civil partner is permanent citizens of United Kingdom.
Gifts could be anything, which has a monetary value such as money, property or possessions or a loss in value when is something is transferred for a value lesser than its original value. In this case, the difference in the cost or value is considered as a gift.
What are Exempted Gifts?
Exempted gifts are those which you can give away without having any sort of tax implication on it and there is an allowance set for the same for a tax year, which is from 06th April to 05th April. You need to stay within the allotted allowance in order to save inheritance tax on it. Although you get allowance each year, it is advisable to utilize the allowance within that year or latest by next following year.
Each individual can annually give away up to £3,000 worth of gifts without having any inheritance tax on it and it is called annual exemption. You can carry forward any unused annual exemption to next year, but only for one year i.e. in case you did not make any gifts in 2014/15, your tax-free allowance for the year 2015/16 will be £6,000. It also implies that a married couple could give away a total of £6,000 a year to their children without incurring any inheritance tax and a total of £12,000 if the previous year’s allowances were unused. Apart from the yearly allowance, you can also make small gifts of up to £250 to any one person in one financial year. However, it is not possible to combine a small gift with your annual allowance.
Gifts which are exempted from Inheritance Tax implications are:
- Wedding or civil ceremony gifts of up to £1,000 per person, £2,500 for a grandchild or great-grandchild and £5,000 for a child.
- Normal gifts which you give away as a birthday or Christmas gift. However, it is important that you are able to maintain your normal standard of living after making the gift. In order to get benefited from this particular exemption, the gifts need to be made on a regular basis rather than it having a onetime affair. Moreover the gifts need to be made from your true income i.e. your income after tax and not from your savings. These exempt payment include:
- Maintenance for your husband, wife, civil partner.
- Maintenance for your ex-husband, ex-wife or formal civil partner.
- Maintenance for relatives who depend on you.
- Maintenance for your children, adopted children or step-children, as long as they are under 18 or in full-time education.
- Regular gifts for Christmas, birthdays or weddings/civil partnership anniversaries.
- Premiums on life insurance policies.
- Any sort of payments to help with another person’s living costs, such as an old relative or a child under 18 years.
- Gifts to charities and political parties: In order to save tax implications on your gift, you can leave some or your entire estate to a charity. However, you can choose to donate to a charity while you are alive or else you can declare this in your will. If you allocate 10% of your net estate to a charity, then in that case, inheritance tax will be cut down to 36%, instead of 40% on the rest of your estate value.
- Lifetime gifts for the upbringing of children and other dependants, if any, do not have any tax implications on it. Few other exempts on the gifts are as below:
- To the political parties.
- To the educational institutions such as universities.
- For national purpose.
- For public health.
You can use more than one of the above listed exemptions on the same person in the same tax year. For example, you can gift your great - grandchild on her birthday and wedding in the same tax year, without having any tax implication on it. It is very important that you keep precise records of when you gift money and to whom, otherwise inheritance tax could be applicable on the gifts when you die. In case you are gifting large sums of money, for example, a deposit for a child’s home, ensure that you write and sign a dated letter to prove when the gift was given and how much was given.
However, any gift that you make has a 7-year rule applicable to it, which is also called as Benefit of Tapering, which can be stated as: If a person gives away more than £3,000 as gift in a tax year or has utilized any of the gift tax exemptions to save tax on his gifts, and dies within seven years of making that gift, leaving an estate of value more than £325,000, then the gift will have certain tax implications and same is explained in the below tabular format:
|Years Between Gift and Death||Tax Paid|
|Less than 3 years||40%|
|3 to 4 years||32%|
|4 to 5 years||24%|
|5 to 6 years||16%|
|6 to 7 years||8%|
|7 or more||0%|
How is Inheritance taxed?
Broadly speaking, taxation in the United Kingdom involves payment of tax to three different levels i.e. The Central Government (Her Majesty’s Revenue & Customs), Devolved Government and Local Government. Inheritance tax is paid to the Central Government i.e. to the HMRC.
Inheritance tax is due when a person dies and leaves property or possessions behind and it is applicable to the entire value of the estate which is cumulative of their savings, investments and current value of their property and possessions. However, if your estate value is up to or lesser than £325, 000, then no inheritance tax will be charged on it. The threshold of £325,000 is also called as Nil-Rate Band or NRB or Inheritance tax threshold. Inheritance tax threshold or Nil-Rate band is the amount up to which no inheritance tax is applicable and this band could vary from an individual to an individual, however the current Nil-Rate Band as per UK Government is £325,000.
|Combined threshold maximum for married couples and civil partners||£650,000||£650,00|
|Chargeable lifetime transfers
Transfers on, or within 7 years of, death
Nil-Rate Band is applicable to all property together with all kind of taxable gifts which is made within or before. Anything over and above the inheritance tax threshold value is charged at the rate of 40%, unless you have transferred at least 10% of your estate to a charity, in which case, it will inheritance tax will be charged at the rate of 40%.
For example, if Susan gives £55,000 each to his son and daughter after considering annual exemptions and he dies in the year 2017 leaving an estate worth £375,000 and declares a will in which he leaves £100,000 to his wife. His will gives a legacy of £100,000 to his wife. Inheritance tax applicable to him will be as follows:
Gifts within 07 years of his death : £55,000* 2 = 110,000
Value of Estate : £375,000
Total : £485,000
Less: Gift to Spouse : £100,000
Chargeable Estate : £385,000
IHT Threshold : £325,000
Balance : £60,000
Tax at 40% : £24,000
In case, you are liable to inheritance tax based on the net value of your estate, then probably you should look at ways to reduce your liability and by doing so, you ensure that your beneficiaries do not end up paying heavy chunk of money as tax.
What are the tax implications of a gift of property?
If you are giving away a property, to your relative, you should consider tax implications, which will vary based on certain parameters such as if you know the person, his age and if there is any mortgage attached to the property in picture.
In case the person, i.e. the beneficiary, is a connected person, which include family members such as children, parents, grandparents (except cousins) as well as family trusts and business that are under donor and if a property is given away or sold at a cost less than its market value, then any tax applicable on it will be charged on it market value rather than on the value it is being sold, provided that the person who is receiving it is a connected person to the donor.
In case, the property that you are giving away as a gift, has not been your main residence for the entire duration that you have owned it, Capital Gains Tax will be applicable on it, however, if it has always been a buy-to-let property, then tax will be applicable on it for the entire time duration you have owned the property.
Capital gains tax is paid on the increase in the property’s value since it was bought, less expenses such as stamp duty and legal fees and there is an annual capital gains tax allowance of £11,000. Any gain, over and above this limit, will be charged at the rate of 18pc for a basic-rate taxpayer or 28pc for a higher-rate taxpayer.
Stamp duty is applicable on a property only if there is a mortgage attached to it and it is payable by the receiver of the. In case there is a mortgage attached to the property, the recipient has to pay the stamp duty on the balance or the outstanding value of the mortgage. Stamp duty land tax on the property was reformed in the year 2014 and it is more or less calculated like income tax. Rate of stamp duty as per various price band is as below:
For example, if Fred has bought a house worth £275,000. He pays no stamp duty on the first £125,000 and next £125,000 will trigger a 2pc tax charges of £2,500, and the remaining £25,000 will incur 5pc tax worth, which is another £1,250. So, on a property worth £275,000, he gives a total stamp duty bill of £3,750.
In case, you are giving away your rental property to your children who is under 18 years of age, you will be taxed on your rental income even if you are not receiving the rental income.
Property gifts count as a "potentially exempt transfer" under the inheritance tax rules. This means that they can be made inheritance tax-free as long as the giver lives for seven years afterwards. After three years the tax amount falls - by eight percentage points each year from the full rate of 40pc - until the eighth year, after which the property is out of the previous owner's estate for tax purposes. Each person has an inheritance tax allowance of £325,000, so if the entire estate, including the property, is worth less than this, there is no inheritance tax liability anyway. From next year the family home allowance will allow parents to increase their allowance when passing property to direct descendants.This will be worth an extra £100,000 in 2017-18, £125,000 in 2018-19, £150,000 in 2019-20 and finally £175,000 in 2020-21, for estates where a property that was the main or "family home" is being passed to children, foster children, stepchildren or grandchildren.
Frequently Asked Questions Related to Gifting Money:
Q: What ways can I give a tax free gift?
A: You can give gift either by depositing it to the person’s bank account, by cheque or by transferring property.
Q: Do I need to declare cash gifts to Her Majesty’s Revenue & Customs?
A: You need not declare cash gifts to HMRC as far as it is within allowed limit i.e. within annual allowance of £3,000.
Q: Can I pay money in my will without paying any inheritance tax on it?
A: Yes, you can gift money in your will without paying any inheritance tax on it, Provided the value of your estate is not more than the allowed limit i.e. £325,000. In case the value of your estate is more than £325,000, then you have to pay the applicable tax on it.
Q: What is the inheritance tax?
A: Inheritance tax is the tax which is paid when a person dies and leaves property or possessions, also called as estate behind and it is applicable on the net value of the estate.
Q: Can I send gift to my friend in UK from a foreign country?
A: Yes you can send gift to your friend who stays in the United Kingdom even if you stay in a foreign country. However, please ensure that you are not sending any counterfeit or pirated goods.
Q: Which gifts require payment of duties?
A: Duty is paid on the gifts which are worth more than £135 if it is being sent from outside the European Union nations. However, exceptions apply to alcohol, tobacco products, perfume and toilet water for which there is separate duty free allowance. Duty will be waived off if the total due is less than £9.
Q: What can you bring without paying any duty i.e. duty free from outside the European Union?
A: There are certain items which you can bring on your own without paying any duty on it in case you want to gift it someone in UK, such as: tobacco products, 4 litres of still table wine, 16 litres of beer, gifts and souvenirs worth £390 etc.
Q: How much duty is required on the gifts which are mailed and who pays?
A: In case the value of your gift is more than the duty free allowance i.e. £135, the recipient of the gift pays the duty once the goods arrive in the UK, however duty has to be paid before the gift is delivered to the recipient.
Q: What if I want to send the gift to more than one person in the same package?
A: In this case, you can combine them in the same package without confusing the per person allowance and each gift must be individually wrapped, addressed to the specific person and listed on the customs declaration.
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