Gifting assets during your lifetime can be a good way to manage inheritance tax but it needs to be considered carefully. Lifetime cash gifts are known as PETs or potentially exempt transfers and can remain part of the estate’s inheritance tax if the donator passes away within seven years of the date of the gift.

Why are gifts taxed?

Gifts are taxed to prevent people from giving away money before they die to avoid paying Inheritance Tax.

You can give away money without paying tax, but it depends on how much you give and who it goes to. Here are some guidelines regarding gifting money without paying tax:

There is an annual gift allowance of £3,000 and any unused allowance from the previous tax year can be carried forward.

Additional small gifts of up to £250 made to an individual are also exempt each tax year, but they cannot be given to anyone used in the £3,000 annual allowance. Anything above £250 is not regarded as a small gift and could be subject to tax.

You can also make regular gifts of any size out of surplus income without paying tax. Your income is regarded as surplus if its loss does not affect your lifestyle.

You may give money to your spouse or civil partner at any time free of any tax implication.

You do not pay tax if you gift money to registered UK charities and political parties or some national organisations, like universities and museums and the National Trust. There are known as ‘exempt beneficiaries’ and there is no limit on how much you can gift to them.

Parents are permitted to give £5000 at their children’s wedding free of tax and Grandparents up to £2,500. Any guest may also give £1000 tax-free at a wedding.

Paying Inheritance Tax

Everyone has an inheritance tax threshold of £325,000 before tax is paid and married couples can pass their allowances across to their spouse on death, potentially doubling the amount available. If you own a main residential house, you will also have an additional exemption of £175,000 each, meaning couples could leave property up to 1 million before paying inheritance tax.

If a gift exceeds these thresholds, then inheritance tax will still be payable on the value of the gift if the donor dies within 7 years.

Inheritance tax is charged at 40% and gifted money is potentially liable for this up to 3 years from the date of the gift. After 3 years the inheritance tax rates are tapered from 32% down to 8% in year 6 -7.

At SFIA our advisers are on hand to answer any questions you may have about the tax year-end or any tax planning matter and can help you navigate the best course of action. Feel free to get in touch for a no-obligation consultation.