Cash gifts and inheritance tax explained
With wedding season on the horizon, the planning of dresses, hats and shoes will be in full swing.
Many people will be thinking about a gift for the happy couple too and it is a good time to think about those gifts from an inheritance tax (IHT) perspective.
It is possible to make tax efficient gifts on the occasion of a wedding. In this situation, the level of tax relief will vary depending on the relationship between the person who gives the gift and the recipient. Each parent, including step parents, can give up to £5,000 tax free. Grandparents can each give up to £2,500, and other relatives and friends can each give up to £1,000.
There are a number of other tax efficient gifts that can be made too.
When making gifts of cash, the rules relating to gifts for IHT purposes must be remembered. Smaller cash gifts are covered by the Small Gifts Exemption, which allows as many gifts of under £250 (to separate individuals) to be made as you wish – they will all be exempt.
All taxpayers are eligible to take advantage of an IHT gift allowance of £3,000 per tax year which will immediately fall out of their estate for IHT purposes. This is one sum of £3,000 which can be split between any number of recipients.
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If you wish to make gifts over and above the £3,000 annual allowance then you would need to survive the gifts by seven years for the value to fall outside of your estate and not reduce your individual tax free allowance (known as the nil rate band) which is available to your estate on your death.
An additional useful ‘gift’ can be the ability to give away an unlimited amount of income. The income must be ‘excess income’. Excess income is income you do not spend on yourself in any way. The ability to make gifts out of excess income can be a useful method of stopping your estate from increasing in value.
When making gifts of money it is important that you keep records. There is no formal place to record the gifts. It is just important that the gifts are known about and that when you pass away your executors have details of the gifts. If making regular gifts out of income it is essential that not only are detailed records kept about the gifts but that you keep records of your income and outgoings in order that your executors can show that the gifts were made out of excess income (and therefore not capital) and did not compromise your lifestyle. A gift to a registered charity is tax free.
If you need clarity about your tax liabilities then expert advice should be taken. Contact our specialist team of North East solicitors at Tilly Bailey & Irvine Law Firm on 01429 350062. We have offices in Hartlepool, Stockton-on-Tees, Wynyard and Barnard Castle.