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7 Simple Things You Need to Know If You’re Planning on Gifting Money

Gifting money or assets during your lifetime is a popular strategy that many people use for reducing the size of an estate and avoiding a potentially large Inheritance Tax (IHT) bill.

While there is a nil-rate band (NRB), an IHT-free allowance of £325,000 where you owe no tax, IHT is charged at 40% of the value of your estate above this threshold. That’s why it can be sensible to consider strategies, such as gifting, to ensure as much of your money as possible goes to those you love.

If you decide that gifting is the right choice for you, make sure you familiarise yourself with the gifting rules in more detail. Read on for seven simple but important things you’ll want to know if you’re planning on gifting money.

Remember: If you do gift any of your money or assets, make sure you keep accurate records of exactly what you gifted and to whom. The Executors of your Will need to know about these gifts when calculating the value and administering your estate.

1. You Can Gift As Much As You Like

In theory, the current rules allow you to gift as much as you like without paying any tax at all. However, this rule comes with a caveat: you must survive your gift by seven years for it to fall outside of your estate.

If you die before the seven-year period expires, there’s a sliding scale known as “Taper Relief” that determines how much tax you’ll pay. See the table below for details:

The larger the gap between your gift and your death, the lower the rate of tax. That’s why, if you want to make gifts without incurring any tax charges, it’s best to do so sooner rather than later.

2. You Have a Personal Gifting Annual Exemption, and Can Make Unlimited Small Gifts

Each tax year, you have a personal annual exemption for making gifts. For the 2021/22 tax year, the exempt amount is £3,000.

The annual exemption can be carried forward for one tax year so, if you haven’t yet used your allowance for 2020/21 or 2021/22, you could gift up to £6,000 tax-free this year.

If you are a couple, you can combine your annual exemptions and gift up to £6,000 between you in a single tax year.

Aside from the annual exemption, you can also make an unlimited number of small gifts, up to £250 in value for each gift. However, you cannot make a small £250 gift to the same person who receives any of your annually exempt amount.

The annual exemption and the small gifting rules can be useful over time, as you can gradually give your money to your loved ones and reduce the size of your estate each tax year.

3. You Can Make Gifts Directly from Your Income

One useful but slightly more complicated way to gift money without incurring a tax charge is by gifting surplus money directly from your income.

For example, you could pay part of your income each month into your child’s savings account, or pay for your grandchild’s school fees each term.

Gifts you make directly from your income do have to meet a set of criteria:

  • The gift must be regular, in both value and frequency.
  • You must be left with enough income to maintain your standard of living.
  • The gift must come from income, and not from “capital”.

If you’re earning more than you need to live comfortably, gifting directly from your income can be a good way to slow the growth of your estate while still giving the money to those you most want to receive it.

4. You Can Make Gifts to Your Spouse or Civil Partner

Gifts you make to your spouse or civil partner are entirely free from IHT, regardless of how much you gift. This includes them inheriting the entirety of your estate, meaning you don’t need to factor in what will happen if you die before your spouse or partner.

Your spouse or partner will also inherit any of your unused IHT allowances, including the NRB. This essentially doubles their threshold before they’ll incur an IHT charge.

5. There are Separate Rules for Gifting to Newly-weds

Gifting to people who are getting married is another way to reduce the size of your estate without being subject to tax.

You can make gifts of up to £1,000 per person without HMRC including it in your estate.

If you’re gifting to family, you can give even more; up to £5,000 to your children, or £2,500 to your grandchildren.

This can be a more direct way of gifting to family, allowing them access to some of your money without being subject to IHT.

6. You Can Gift to Charity Tax-Free

Making a gift to charity in your Will is a good strategy for reducing an overall tax bill, especially as the government has designed rules to encourage it.

By gifting your money directly to charity, you’ll be charged no tax on your gift at all.

Even better, if you leave at least 10% of your estate to charity in your Will, the government will reduce the amount of IHT you owe on anything over the NRB, from 40% down to 36%.

This reduction could allow you to get even more money into the hands of those you want to have it, while also contributing to a good cause.

7. Use Trusts to Protect Your Gifts

If you have concerns over who might get their hands on your money after you die, you could consider using Trusts. These structures allow you to make your gifts securely without the worry of claims from other parties who think they have a stake in your wealth.

A Trust allows you to appoint someone, known as a “Trustee”, to give your money or assets at a time of your choosing (even after your death) to someone of your choice, known as a “Beneficiary”. This allows you to set up protections that control who receives your wealth, even if you’re not there to do it.

Gifting through Trusts can change the rules over how your IHT is calculated. This can be a complex arrangement so, if you’d like to know more about how setting up a Trust could impact your estate and potential IHT bill, please do contact us.

Considering Gifting Your Money?

If you’d like to know how gifting money or assets could help reduce the size of your estate and cut a tax bill in your specific circumstances, please get in touch with us at Strathmore Wills and Estate Planning.

Email enquiries@strathmorewills.co.uk or call 01708 923 303 for more information.

Please note:

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.

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7 Simple Things You Need to Know If You’re Planning on Gifting Money