Probate and Will, Trust & Estate Disputes

Publish date

6 December 2023

What are the tax implications of gifting assets to loved ones at Christmas?

With Christmas fast approaching, Amy Lane at Thomson Snell & Passmore answers questions about the tax implications of giving money or other assets during the festive season (or indeed at any time), for the Times of Tunbridge Wells.

What are the rules on gifting money and assets to friends and family?

Everyone is of course free to gift their assets as they see fit, but it important to keep in mind that Inheritance Tax (IHT) may have to be paid after your death on some gifts. There are some exceptions to this. For example there is no IHT to pay on any gifts between spouses or civil partners, providing the recipient of the gift is domiciled in the UK (with a more limited exemption available where the recipient is domiciled in another country).

In addition, everyone has an annual exemption of £3,000 a year and you can roll forward one year’s allowance if it was not used the previous year. You can also give up to £250 per person to an unlimited number of individuals each tax year, although this allowance cannot be used in conjunction with the £3,000 allowance.

There are also special rules around gifts for weddings and civil partnerships, meaning you can give up to £5,000 to a child or £2,500 to a grandchild who is getting married. These gifts will be exempt from IHT provided they are made before the wedding takes place.

Regular gifts made out of surplus income rather than capital are also exempt from IHT, but it is important to keep accurate records of such gifts to assist your executors. For example, a high level of detail is required to prove that gifts out of income were indeed from surplus income and it is worth looking at HMRC’s form IHT403 to see the type of records that your executors will be expected to provide to claim this.

Any such gifts over those mentioned above are potentially exempt transfers (known as PETs) and so may be chargeable to IHT if you die within seven years of the gift. This is known as the ‘seven year rule’.

What are the tax rules when gifting money to charity?

Any money passing to a registered UK charity, whether through a lifetime gift or as an inheritance, is exempt from IHT. A lower IHT rate of 36% also applies, broadly speaking (although it is slightly more complex than this) so long as 10% of the residuary estate passes to charity.

Charities can also benefit by way of a post death variation. Even if no gift to charity is made under the deceased’s will, the beneficiaries of the estate can posthumously redirect some of their inheritance to charity in this way and have a two year window starting with the date of death in which to carry out a variation.

What else do I need to consider when it comes to gifting to family and friends?

Subject to limited exceptions, you should not retain any benefit in any asset that you give away. If any benefit is retained then the asset will still be included in your estate for IHT purposes.

It is important to seek legal advice when making gifts, especially for IHT planning purposes, as it is a complex area and other taxes can also come into play. It is equally important to make sure you retain enough funds to live comfortably.

Give early, give often, but don’t give away more than you can afford.

Heathervale House reception

Keep up to date with our newsletters and events