Archived article: This article was correct at the time of publishing. Tax, investments and pension rules can change over time so the information below may not be current.

Financial Planning

This Christmas, give your loved ones a financial gift without the surprise tax bill

We’re approaching that time of year when gifts will be exchanged – some big, some small. But do you know about the potential tax implications of making and receiving financial gifts?

So what are the rules on gifts?

Most of us make gifts of monetary worth each year, but don’t consider the possible tax implications. Although many of these gifts fall within HMRC’s limits, as we all seem to be spending more and more each year it is possible that we might inadvertently create taxation issues for ourselves and potentially the recipients.

The good news is that gifts of any value among (UK domiciled) spouses and civil partnerships are free from tax. Gifts for national benefit (such as to museums, libraries and the National Trust) and to charity are also tax free.

What about gifts to individuals?

Unfortunately, gifts to other individuals do not fall within the tax-free remit and are taxable unless they meet the following conditions:

  • The total value of all gifts made by you in a tax year is less than £3,000
  • Gifts of up to £250 can be made to any number of people in the tax year, provided the total to any one person does not exceed £250. If it does, this exemption does not apply and all gifts would start to use up the £3,000 annual allowance
  • Gifts should be out of regular income and must be part of normal ongoing expenditure
  • Gifts can also be made tax free in respect of marriage or civil partnership amounting to £5,000 from each parent, £2,500 from each grandparent and up to £1,000 from any other person. These would not use up any other allowances

What happens if you breach any of these limits?

There is actually no tax payable by the donor of the gift during their lifetime. Tax would only be payable if the donor died within seven years from the date the gift was made. This can be up to 40% of the gift’s value and the recipient will be liable. Whether or not a charge is due will depend on the donor’s other lifetime gifts before death and available Inheritance Tax nil-rate band.  This is the amount up to which an individual can leave as a legacy before a tax charge becomes due. The current nil-rate band is £325,000.

Many people are not aware that if the donor dies within seven years of making the gift, but the value of the gift falls within the deceased’s Inheritance Tax nil-rate band (resulting in no tax for the recipient), another beneficiary of the deceased’s estate could end up effectively paying the tax for it!

The only time a donor will be subject to tax on a gift during their lifetime would be if they:

  • Gifted something but continued to receive a benefit from it (such as a house and continued to reside in it)
  • Make a gift to a discretionary trust, over their available Inheritance Tax nil-rate band

Both scenarios can be quite complicated and you should seek specialist tax advice if you need advice on either.

Ultimately, making gifts of any significant value falls within estate planning. It is worth noting these tax laws are notoriously complicated. We’ve given you the basics here, but if you’d like to know more then please contact one of Tilney’s financial planners.

If you would like to discuss the above in more detail please give us a call on 020 3131 6189. We would be happy to assist. We also have a guide to making financial gifts that may come in useful – why not read it today?

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