TAX implications - GIFTS
Immediately exempt transfers
The main ones to note are:
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• Annual gifts of up to £3,000. Individuals have a £3,000 limit. This amount can be given to one recipient or divided among several. If the allowance is not used in one year, it can be carried forward to the next year only.
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• Any number of gifts of up to £250 per recipient per year. It is important that a recipient does not receive any more than this amount or the exemption will be lost. You cannot for example, give both a £3,000 gift and a £250 gift to the same person.
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• Gifts of any amount which are funded out of your normal spending, provided they don’t reduce your normal standard of living.
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• Gifts for the maintenance of your family, such as for children under 18 or still in full-time education. There is no specific limit on these gifts.
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• Gifts made on marriage. Parents can give up to £5,000 to a child (each parent has the allowance); grandparents can give up to £2,500 each and for any other adult the limit is £1,000.
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Potentially exempt transfers
Any gifts exceeding the immediately exempt transfer limits would be counted as potentially exempt transfers. This means that if you live for seven years after the gift is made, they will not be liable to inheritance tax (IHT). If you die earlier, they will be counted against your tax-free allowance (ie the first £300,000 in 2007/08, £312,000 in 2009). If they exceed that amount, the tax payable will depend on how long you have lived since making the gift – as shown in the table below.
Years between % of full IHT rate gift and death (40%) payable
| 0 – 3 |
100% |
| 3 – 4 |
80% |
| 4 – 5 |
60% |
| 5 – 6 |
40% |
| 6 – 7 |
20% |
| 7+ |
nil |
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For example, if you die within three years of making the gift, the full amount of any inheritance tax on the gift will be payable. If you die between three and four years later, only 80% of that amount will be due.
Passing money to children on death
If you have children, it is vital to make a will. This can help save tax on your assets. Couples can use their wills to ensure they utilise the tax-free allowance for inheritance tax twice over.
Instead of leaving all their assets to each other on death, each can create a discretionary trust in their will for an amount up to the starting limit for tax (£300,000 in 2007/08, £250,000 in 2009) for a range of beneficiaries including their surviving spouse, children and grandchildren.
This money will not form part of the surviving spouse’s assets, even though they may continue to derive a benefit, such as an income, from those assets at the trustees’ discretion. On the death of the surviving spouse, a further taxfree allowance will apply to that
spouse’s assets.
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