To gift or not to gift…that’s the question, but what is the answer?

If you are thinking about making a gift to someone, it’s worth knowing the dos and don’ts as well as the potential tax consequences.
Gifts to spouses and civil partners 
It might not be the most romantic of reasons for getting down on one knee and popping the big question on 29 February, but if you do get married or enter into a civil partnership and both you and your spouse/civil partner are UK domiciled, you will, thereafter be able to make unlimited gifts to your spouse or civil partner during your lifetime without any Inheritance Tax consequences.

In addition, upon death, you can pass your entire estate to your spouse or civil partner without any Inheritance Tax arising. It is also possible on the second of a couple’s death to carry forward any unclaimed allowances from the estate of the first to die which, when combined with the second to die’s own allowances can result in considerable Inheritance Tax savings. Under current legislation if a married couple or those in a civil partnership were to leave everything (including the family home) to each other and then to their children, they could have an estate of up to £1,000,000 before any IHT would fall due. 

Unfortunately, the position is not as favourable for unmarried couples where any gifts between the couple can result in an Inheritance Tax bill and there is no such ability to share IHT free allowances. 
What about gifts to others? 
You can make gifts to anyone you wish; however, if you fail to survive 7 years from doing so, the value of said gift will be brought back into account upon your death and may have a bearing on the Inheritance Tax that will be payable in relation to your estate.
Allowances and exemptions 
You can give away up to £3,000 per year without any Inheritance Tax consequences. In addition, if you did not make any gifts in the previous tax year, then you could carry forward the previous year’s allowance and combine it with the current year’s allowance, meaning that you could make a gift of £6,000 in any one tax year without any IHT falling due. You can however only carry forward one year’s allowance. 

Therefore, if you made no gifts in the 2018/2019 tax year and have made no gifts in the 2019/2020 tax year, you still have until 5 April 2020 to make a gift of £6,000. For a couple, this would mean you could make a combined IHT free gift of £12,000 before 5 April 2020 and would then have the benefit of a new allowance commencing on 6 April 2020. 

Separately from the annual £3,000 allowance, you can make gifts of £250 to as many individuals as you wish; however, you cannot combine the two allowances.
If wedding bells are ringing 
You can be the most popular guest at any wedding by making a gift to someone who is getting married without any IHT implications. You can give £5,000 to your own child; £2,500 to a grandchild and £1,000 to any other blushing bride and groom to be.
If your income is surplus to your needs 
If you have more income than you need, then you can opt to make regular gifts from this surplus income. As long as it can clearly be shown a) that you have sufficient income to meet your regular expenditure and b) that your standard of living is not affected by making those gifts, it should be possible to claim this exemption from HMRC upon your death and thereby avoid paying any IHT in relation to these gifts.
Record keeping 
If you do choose to make gifts, it is essential that you keep clear records of the date upon which the gift was made and the amount of the gift itself. This information is vital for reporting to HMRC after your death and for ensuring that any IHT that is due in relation to your estate is accurately calculated. In the case of gifts that are made from surplus income, HMRC has issued a very detailed form which must be completed for each year within which any such gifts were made. It is wise to complete these forms on an annual basis during your lifetime rather than asking your executors to attempt to do this after your death.
Tying up loose ends 
To avoid unwanted duplication and potential family conflict, it is wise to ensure that your Will takes account of any gifts that you have made during your lifetime. Similarly, if you do not want any lifetime gifts to be taken into account when your estate is distributed after your death, your Will can be altered to make this clear.
If you have any questions or need any further advice please get in touch with your usual contact at Wansbroughs or either email us at wealth@wansbroughs.com or telephone us on 01380 733 300.

Last updated 27/02/2020