Gift tax is a tax imposed on transfers of property, cash or assets during the lifetime of the giver. The type of gift and its value will determine the amount of tax to be paid or, in some circumstances, refunded. Some gifts are exempt from tax altogether while others are subject to strict limits. If you are considering gifting some of your assets, ensure you're clear about the tax implications.
Inheritance tax is payable on someone's estate after they die. This includes any gifts of cash, property or possessions given to anyone. For the 2013/14 tax year, the threshold is £325,000. This means that inheritance tax is only payable on the value of gifts exceeding that amount and is charged at 40 percent.
If you live for seven years after making a gift to someone, it is exempt from inheritance tax regardless of the value. This is known as a potentially exempt transfer (PET). If you continue to benefit from something you have gifted, it will not be exempt from inheritance tax and is called a gift with reservation of benefit. For example, if you give your house to your children but continue to live there without paying rent or gift your car but still use it, it is considered to still be your possession.
You can give away up to £3,000 per year and carry over any unused allowance from the previous tax year. This allowance is the total amount and not per person. You can make small gifts of up to £250 to multiple recipients; however, you cannot use this exemption with the £3,000 annual exemption for the same person.
You can gift unlimited sums to your husband, wife or civil partner providing they reside permanently in the UK. Gifts to unmarried partners or unregistered civil partners are not exempt from inheritance tax. Certain EU registered charities, national museums, universities and the National Trust may receive tax-free sums from you and may be able to claim some tax back from such donations. The HM Revenue and Customs (HMRC) website provides full details on tax efficient giving to charity.
Normal expenditure gifts
You are allowed to give away money from your surplus income, providing the gift does not reduce your standard of living. Regular gifts for maintenance of children and their education, husband, wife, civil partner or exes and relatives dependent on you through old age or infirmity are exempt from tax.
If you give or promise to give a cash sum or gift shortly before a marriage or civil partnership ceremony, certain limits are imposed to provide tax-free exemptions. Parents can give cash or gifts up to £5,000. Grandparents and great grandparents have a limit of £2500 and anyone else is subject to limitations of £1,000. If the ceremony is cancelled and you have given the gift, the exemptions will be invalid.
The HMRC advises keeping accurate records of any gifts given or received. It will help your executor or personal representative sort out your financial affairs after you die and prevent any unnecessary tax deductions from your estate.