Tax implications of gifting
People give gifts for various reasons. Some may want to assist someone who is struggling financially, while others may need to borrow money from the bank of mum and dad. Additionally, some individuals may want to minimize the amount of inheritance tax their children have to pay on their assets. Whatever the reason, you should be fully aware of the potential tax consequences.
Capital Gains Tax – key points to consider:
- If you give away an asset that has appreciated in value during your period of ownership, then a capital gain has been made.
- It may be necessary to report that gain to HMRC
- One of four different rates of Capital Gains Tax may be payable on that gain.
- You may be able to claim one of many reliefs
- You may be able to ‘hold over’ the gain so that you pass the asset, the gain and the tax to the new owner
- You must seek professional advice before you make the disposal. This is so any potential gain, the rate of tax and the amount of tax you pay, can all be kept to a minimum.
Inheritance Tax – key points to consider
When calculating inheritance tax, the value of gifts you give while alive can impact the amount you owe. The following exemptions can help mitigate this:
- Gifts of any amount to a UK-domiciled spouse or civil partner
- Gifts of any amount to a UK-registered charity or political party
- Gifts covered by the annual exemption of £3,000 in each tax year. You can bring forward this exemption for one year only. A husband and wife could each give away £6,000 if neither has used their exemption in the previous tax year.
- Gifts on marriage or civil partnership
(i) up to £5,000 each to a child
(ii) up to £2,500 each to your grandchildren
(iii) up to £1,000 to any other person.
- These gifts will be ignored in valuing your estate for inheritance tax purposes
- Regular amounts which are given out of income and which once paid, do not affect your standard of living. These gifts need to be carefully structured and recorded to ensure the best possible chance of successfully claiming an exemption.
- Gifts of up to £250 to any number of individual recipients each tax year.
- Gifts made for family maintenance to a spouse, civil partner, child or dependent relative for support and maintenance.
Keeping records of any gifts made or received is crucial. The personal representatives of your estate will have to report your gifts to HMRC and claim the exemptions on them.
Changes to the way the above exemptions work are always under review and can be complicated. If you have any questions about the tax implications of gifting, get in touch with our Private Client team who will be happy to help.