If you intend to make a gift to your family, you may become subject to federal gift tax, depending on the value of the gift. Gift tax, however, is only triggered under certain circumstances. Gift tax is always levied against the giver, never the recipient. The amount of the gift is not reported on Form 1040 -- it is reported on a separate tax return.
For a transfer of money or property to count as a gift, two conditions must be met. First, the net effect of the transaction must result in a pecuniary gain to the recipient -- for example, if you sell a £26,000 car to your son for £3,250, the amount of the gift is £22,750, even though the car was sold rather than donated. Second, your ultimate motivation must be charity, generosity or admiration, as determined by objective evidence and surrounding circumstances.
As of the 2009 tax year, you will not be taxed on the first £8,450 of the value of a gift to anyone, including a family member. This applies to each recipient per tax year. If you made a £22,750 gift to your son, for example, you would become subject to gift tax on £14,300. If you gave £9,750 to your son and £9,750 to your daughter, you would become subject to gift tax on £2,600 -- £1,300 for each of them. This applies regardless of whether you gave the gifts in lump sum or in instalments, as long as the full amounts were transferred during the same tax year. If you and another donor, such as your spouse, jointly gift another, the exemption is doubled -- £16,900 per recipient per tax year. Payment of tuition expenses is not subject to gift tax. The cumulative lifetime exclusion was £877,500 as of the 2009 tax year.
Gifts to Spouse
In general, you may give as much as you want to your spouse without triggering the gift tax. Two exceptions apply, however. If you are no longer married to your spouse at the time you make the gift, the ordinary £8,450 exclusion applies. If your spouse is a citizen of a foreign country, a special £86,450 annual exclusion applied as of the 2009 tax year.
Gift Tax Return
If the amount of your gift does not exceed the annual exclusion, you don't need to file a gift tax return. If you are subject to gift tax, you must file IRS Form 709 by April 15 of the year following the year in which you made the gift. The amount of the gift tax is graduated according to the amount of the gift. As of the 2009 tax year, the top gift tax rate was 35 per cent of the taxable value of the gift.
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