Posted by James McNeile, Partner
Gifting doesn’t need to be taxing
Christmas is the time of year that people think about giving to loved ones and charities but the unintended tax and legal consequences can dampen that warm glowing feeling. We look some common issues and pitfalls encountered when making gifts under English law.
First things first, inheritance tax (IHT) is a misnomer. IHT applies to lifetime gifts as much as it does to inheritances on your death.
There is no immediate charge to IHT on making a lifetime gift (other than gifts into trusts). If you live for more than seven years, the gift becomes fully exempt from IHT. However, if you die within seven years of making the gift, it will form part of your estate and where your estate exceeds the nil rate band it becomes subject to IHT. After three years of surviving the gift, the amount of IHT due is reduced by 20%. For the following years the tax is tapered down so that at year seven the IHT is reduced by 100% (i.e. becomes fully exempt).
There are a number of exemptions that, if applicable, will result in a reduced or no potential IHT liability:
Gifts between spouses/civil partners
Such gifts are exempt from IHT. Spouses/civil partners must both have a UK domicile (deemed or otherwise) or both must have a non-UK domicile. Where gifts are made by a UK domiciled spouse to a non-UK domiciled spouse, the exemption is limited to the nil rate band which is currently £325,000.
Gifts to charities
These are exempt from IHT. The charity must be a UK, EU, Norwegian, Icelandic or Liechtenstein registered charity.
Normal expenditure out of income
Lifetime gifts that are part of your normal expenditure are exempt. You should have enough income to maintain your standard of living and you need to show a pattern of giving.
Lifetime gifts of up to £250 to a person during a tax year are exempt from IHT. If the gift is over £250, this exemption will not apply.
Lifetime gifts that do not fall into other categories are exempt up to £3,000 a year. All or part of the unused exemption can be carried forward for one tax year.
Capital gains tax
Individuals have a capital gains tax (CGT) annual allowance, which for this tax year is £11,700. Although, those non-UK domiciled individuals claiming the remittance basis do not.
Gifts between spouses/civil partners
CGT is charged on the difference between the value of the property on disposal and the acquisition cost. The general rule is the disposal is made at market value at the time of the gift. However, the disposal value where the gift is between spouses/civil partners is the acquisition cost rather than the market value at the time of disposal. This means that there is no CGT liability on gifts between spouses/civil partners. However, CGT is deferred until the time a property is gifted to someone other than a spouse/civil partner.
Gifts to charities
Where gifts are made to charities the disposal value is the same as your acquisition cost and therefore you will not have a CGT liability. As with IHT, the charity must be a UK, EU, Norwegian, Icelandic or Liechtenstein registered charity.
Where you gift property that has a value of £6,000 or less, the gains will be exempt from IHT.
Gains that arise from foreign currency are subject to CGT. However, if you make a gift to your family for their personal expenditure, the gains will not be subject to CGT.
Gifts of business assets
If you decide to gift shares of your company or assets used for the purposes of the business carried on by your company, the gains can be “held over”. CGT will not be due on the gift but when the recipient disposes of the shares/assets, they will pay CGT on the gain during their period of ownership and the historic gain. To qualify for relief you must exercise at least 5% of the voting rights.
Usually there are no income tax issues on gifts. However, one scenario that can catch people out is where parents or step parents make a gift to their minor children. You will hold the gifted assets as bare trustees for your minor children and you will be taxed on the income over £100.
Gifts under a power of attorney
You may be acting as attorney (or court appointed deputy) for a relative or friend and you may be asked, or expected, to make a gift to their friends, relatives or charity. Gifting where someone lacks capacity is restricted and fraught with pitfalls which means that without careful thought and advice, you, as attorney, could find yourself in a difficult situation and face the scrutiny of the Office of the Public Guardian, ultimately having to pay back the money you gifted. HMRC can also overturn the gift for tax purposes if it was made without proper authority.
In order to make a gift on behalf of someone who lacks capacity (the “donor”) you have to satisfy the following three criteria:
1. The recipient of the gift must be related or connected to the donor (for example a friend or colleague) or be a charity they would normally or might reasonably be expected to have given to.
2. Where there is a gift to a person (as opposed to a charity) the gift must be made on a customary occasion such as a birthday, wedding, anniversary or a religious event where gifting is customary.
3. The gift is of a reasonable value. What is reasonable will depend on the donor and the circumstances. You have to take into consideration a number of things including the value of gifts the donor made to the recipient when they had capacity and whether the gift affects the donor’s ability to meet their current and future living expenses.
If any one of the three criteria above are not met, you need to seek permission from the Court of Protection to make the gift.
The rules relating to gifting by attorneys are quite rightly stringent. That is not to say that you cannot make gifts, even substantial ones, where someone lacks capacity. With experienced professionals on hand to help navigate the rules, you can make gifts to effect the donor’s wishes, to mitigate inheritance tax, and to benefit their loved ones and charitable causes close to their heart.
Gifting is not just for Christmas
Looking at gifting more broadly, it can be a good estate planning strategy to pass wealth to your loved ones in a tax efficient way. With expert advice and a properly considered plan, you can see the benefit of the fruits of your labour during your life in the knowledge that your wealth is being preserved for your loved ones.
For more information on tax efficient gifting, IHT and estate planning, contact James McNeile and the team on
01225 730 235 Email us