As a Private Wealth solicitor, I often get asked about gift giving and inheritance tax. With Christmas coming up, this may or may not be on your mind!
When looking at gift giving and Inheritance Tax implications, there are a number of rules and exemptions that are often muddled up. The following flow chart is a very simplified model of what to consider and the impact it may have on your Inheritance Tax planning.
The first thing to consider is if your gifts are made up of capital or income.
For gifts out of capital, you can give gifts of up to £250 to any one individual during one tax year to as many individuals as you like. This is known as the small gift exemption. If gifts exceed £250 per person per tax year (and does not fall into any other exemption), the exemption cannot be used, and these gifts would form part of your annual exemption of £3000 per tax year.
As you may be aware, everyone has an annual exemption of £3000 per tax year. If the annual exemption is (wholly or partly) unused for a particular tax year, the unused portion may be carried forward for one tax year only. This exemption is limited to £3000 in total and is not £3000 per person.
Gifts above £3000 per tax year are potentially exempt if you survive for seven years from the date of the gift. If you fail to survive for seven years, the gift becomes chargeable and will use up all or part of your nil rate band (currently £325,000). If Inheritance Tax is payable, it will be paid by the person who received the gift.
Where gifts are made out of normal expenditure of income, they are exempt from Inheritance Tax providing there is sufficient income to maintain your usual standard of living. When an executor has to complete the relevant Inheritance Tax forms, they have to provide HM Revenue and Customs with a large amount of data and so if you would like to consider making gifts out of income, it is best to get legal advice as to how to document the gifts made.
Please note that there are a number of other exemptions when considering gifts and if you would like to discuss this with a solicitor, please do not hesitate to contact Alexandra Francis by clicking here.
In the case of British University in Dubai v Ebrahimi (2021), Professor Robert Whalley handwrote a one-page Will two months before he died, leaving his entire £1.7 million estate to his old friend and colleague, Kambiz Ebrahimi and Mr Ebrahimi’s wife.