Wanting to look after your family is one of the oldest human emotions – and if you are lucky enough to be able to pass on money to help younger members of the family, there are many ways to do so.
However, there are all kinds of tax consequences and other potential pitfalls of giving money away – so read on.
Goodies that grow
Giving money away is the safest way to make a gift.
If you give anything else then you may have to pay capital gains tax on the rise in value between the day you bought it and the date of the gift. Shares, land, property, a valuable painting, and most other things are subject to this rule.
You will have to get a valuation at the date of the gift and fill in a self-assessment form to assess and pay any tax due. You can deduct any expenses of buying or selling or improving (but not repairing) the asset. There is a capital gains tax allowance of £11,100, so only a gain above that is taxable.
For most items, the gain above £11,100 is added to your income and taxed at either 10% if the total is below £43,000, or 20% if you pay higher rate tax. Add another 8% to each rate if the gift is residential property.
There is a different way of taxing the gain on a ‘chattel’ (such as furniture, paintings and jewellery) worth less than £15,000 at the time of the gift. If it is worth less than £6,000, no gain needs to be recorded. From £6,000 to £15,000 take advice as it gets complex. But not all items are liable to CGT.
Read more about the rules around giving property to your children
Don’t give too generously
Making a gift can affect entitlement to state benefits for both you and the recipient.
If the person you make the gift to gets a means-tested benefit, then a gift of money or property will count as part of their capital. That will generally have the effect of reducing or wiping out the means-tested help they can get.
Gifts of personal property will not normally affect means-tested benefits. Rules for each benefit are different. Check the effects by filling in details at entitledto.com. A gift should not affect a claim for universal or tax credit; any income it generates will.
If you give away capital, it may affect your entitlement to state help in the future. It is called ‘deliberate deprivation of assets’. If any part of your intention in giving money or property away is to increase your entitlement to state help, then the Department for Work and Pensions can treat you as if you still owned what you gave away.
The same rule applies if you need to claim help in future with your care costs. Local authorities increasingly use this rule to refuse help as their own finances are squeezed.
Can you avoid care costs?
That place in the sun...
If you own property in another country, the rules about inheritance and capital gains may be very different.
Gifts between spouses or civil partners may not be free of tax. There may be capital gains tax to pay and rules about inheritance tax will be different.
If you are resident in the UK when you die, you have to pay inheritance tax on your worldwide assets. If you also have to pay tax abroad, then there may be a double taxation agreement so you do not pay tax twice on the same property.
You should always seek local legal advice in the other jurisdiction before making large gifts of property or money held abroad.
Go to gov.uk and search ‘inheritance tax gifts’ or ‘capital gains tax’ to find basic information.
The HMRC Probate and Inheritance Tax Helpline 0300 123 1072 is very helpful too.
Will my children have to pay tax on the money I give them?
If you give a relative money, they do not have to pay income tax on it – assuming, of course, they did not do any work for you to earn it, in which case they might! But inheritance tax (IHT) could be an issue.
If you die within seven years of making the gift, then it may be seen as part of your estate, and if the total amount of your estate exceeds the threshold, then IHT may be applied. But there are exemptions that will reduce the amount due.
Download Paul Lewis' new guide to Taming Inheritance tax
What you can gift tax-free per year
You can give away up to £3,000 in total to one person, or share it between several, in a tax year without it counting towards your estate.
If you give nothing away in one tax year, then you can bring £3,000 forward from that year and give away £6,000 the next tax year.
If you are married or a civil partner, then you can double those amounts by giving the money to your spouse or partner and they can then give it away, as our diagram demonstrates.
If you are living together unmarried, then giving to a partner will be treated the same as giving money to anyone else and may form part of your estate if you die within seven years.
You can give up to £5,000 to a child of yours as a wedding gift – and up to £2,500 to a grand or great-grandchild, or £1,000 to anyone else on their marriage. You can combine this with the £3,000 exemption.
For more useful tips and information, browse our money articles
You can also give up to £250 each to any number of people on any occasion – but not to anyone who has benefited from any other exemption.
If you have income you don’t need, you can give that away, too; there is no limit as long as it does not reduce your lifestyle.
Spousal maintenance payments, gifts to a child of yours (but not a grandchild) to pay for their full-time education, or gifts to any financially dependent relative all fall outside your estate. Make a note of the exemption and keep it with your will.
If you give away amounts above these exemptions and you die within seven years, then they will form part of your estate. The 40% rate of tax falls to 32% if you have lived for 3-4 years, 24% for 4-5 years, 16% for 5-6 years and 8% if you die 6-7 years later.
If you plan to give away more than £350,000 in total, seek legal advice.
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