Are gifts tax-free?

Showing gratitude for a gift, however you really feel, is a skill we all learn. We don’t want to hurt anyone’s feelings if we can help it.

But what about an unexpectedly generous gift?

Surely there can’t be any drawbacks to receiving a large sum of money?

Imagine your Grandma or Grandpa won the lottery or EuroMillions. Not a few hundred pounds for a slap-up meal, or even a few thousand pounds to take the whole family away on an exotic, tropical holiday. The multi-million jackpot! If your generous grandparent decided they wanted to share their luck with their family, they might choose to divide the winnings between their children and grandchildren. Wonderful news, of course, and there is no income tax payable on a lottery jackpot, but there is a possible sting in the tail…

If your grandparent were to die within a couple of years of their lottery win, even though they gave away the winnings, you and your family who received this money as a gift could face a huge inheritance tax bill. It could be up to 40% of the total prize.

Why is there a tax bill on inherited money?

Inheritance tax is payable on inherited money. Individuals have an inheritance tax allowance of £325,000 and a residence nil rate band of up to £175,000. This means the maximum anyone can leave to their family without any inheritance tax is £500,000. In certain circumstances, a married or civil partner couple could leave up to £1m without a tax bill.

The sting in the tail is that if you die within 7 years of a generous lifetime gift, the gift still forms part of your estate. Tax at 40% is payable on anything over the lifetime allowances. There’s a sliding scale called taper relief, that applies to gifts given within 3 and 7 years before death.

You can give as much as you like to your spouse or civil partner as long as they are a permanent resident in the UK. There are other allowances for gifts - you can find out more here: Lifetime gifting allowances

HMRC’s rules do not allow giving away your wealth shortly before death to avoid inheritance tax, but there are ways of minimising the effect of inheritance tax if your estate is likely to be worth more than the available allowances.

Anything passed to a husband, wife, civil partner, charity, or political party is free of inheritance tax. Anything gifted more than 7 years before you die is also exempt, but only if it is a genuine gift.

If you give your home to your children but carry on living it this is called a gift with a reservation of benefit, and the full value will be included in the your personal wealth value. There are other potentially catastrophic and expensive downsides to gifting your home to your children. For example, if your adult child owns part of your home and gets divorced, your home will form part of their divorce settlement, and you could be forced to find somewhere else to live. Your children will also have to pay Capital Gains Tax on any increase in value when they sell, and there are additional Stamp Duty Land Tax costs to consider too. You’ll find more information in our blog: Protecting the home

It’s never too early to start estate planning. True enough that you won’t be around to pay an inheritance tax bill yourself, but you’ve worked hard for your wealth so shouldn’t you choose who benefits from it?

If you are lucky enough to receive a large gift, it’s important to consider any potential liability to inheritance tax.

Get in touch to chat about your options.