18 Nov 2024

Lifetime Monetary Gifts: Allowances and Tax Implications

A monetary gift is a discussion that will crop up in most people’s lives; it doesn’t necessarily matter at what stage, or who the gift is for, the desire to support loved ones will come up.

Whether it is parents giving to children or grandparents giving to grandchildren, the provision of monetary gifts is well-natured in intention.

But have you considered the allowances and tax implications that one may attract?

This article, in discussion with one of our Wills, Probate and Trust experts, Josef Lythe, focuses on the ramifications of a monetary gift:

Gifting rules

Gifts between spouses and civil partners are free of tax both during your lifetime and after death. However, lifetime gifts to children and other family members are treated differently and may carry tax implications.

Everyone has an annual ‘gift allowance’ of £3,000 meaning you can give away up to £3,000 worth of money or assets without any tax implication each tax year.

Additionally, if you do not utilise this allowance one tax year, it can be carried over to the next tax year meaning you would then have £6,000 gift allowance. Only one year’s allowance can be carried over and is important to note this is £3,000 in total and not per person.

Any gifts made that exceed the gift allowance could carry with them inheritance tax implications.

There are additional rules for small gifts under £250 and wedding gifts. Small gifts under £250 do not have any tax implications unless they are made to someone you have already gifted a sum more than your gift allowance to.

Some wedding gifts are also exempt from tax implications. For example, you can give a child up to £5,000 for their wedding, and grandchildren up to £2,500 without any tax consequence.

Tax implications

If you make gifts that exceed your gift allowance, then there may be tax implications to consider. When deciding to make such a gift it is important to consider when this gift is made.

There is a legal rule known as ‘the seven-year rule’ that states if you live for more than seven years after the date the gift is made, the value of the gift will not be considered as part of your estate for inheritance purposes and these types of gifts are often referred to as potentially exempt transfers or PET’s. They are ‘Potentially Exempt’ because if you survive the seven years, they could become exempt.

If you were to die before this seven-year period lapses, the value of the gift would be considered as part of your estate for inheritance tax purposes, even though you have given away this money or asset to somebody else.

Should you die in this seven-year period then Inheritance Tax could be payable unless the PET falls in the £325,000.00 Nil rate band allowance.

Depending on when you die within the seven-year period, and if the value of the gift exceeds the Nil rate band allowance, there may be some additional tax relief available in the form of ‘Taper Relief’ which is available between years three to seven.

For example, if you die six years after making the gift, greater tax relief would be available than if you die four years after the gift is made.

It can be problematic if you make large gifts and they are considered part of your estate for tax purposes, as the value of your estate which would be taxable is greater than what assets are actually in your estate on death. Whilst unlikely, this could mean there are insufficient assets in the estate to pay the tax bill.

It is important you be aware of the gifting rules and the potential tax consequences of making large monetary gifts.