There might come a time when you’d like to gift some of your estate to a family member. If you’re planning to do so, you should be aware that there are various tax implications with gifting in the UK. This was implemented by the government to stop people from gifting their estate to avoid paying 40% inheritance tax.
Being familiar with these tax regulations can help you find the best way to gift part of your estate and potentially avoid significant expenses for your beneficiaries.
In the UK, a gift can be money, property, or any asset of value. Note that this also includes a loss in value, such as selling a share worth £5000 to a family member for £100 or property for less than it’s worth. The difference will be considered a gift in the eyes of the HMRC.
The HMRC allows individuals to give up to £3,000 tax-free each year. This can be cash or any asset(s) worth up to that amount. There are other scenarios where a gift can also be tax-free, such as a wedding gift, a gift to your partner, a charity gift, or a gift to cover living expenses. The HMRC allows this tax-free total to roll over once, so you could give up to £6,000 tax-free.
You can also give unlimited small tax-free gifts worth up to £250 each year. Note that the £3,000 is the total for the year and not per person you intend on gifting to.
If the gift exceeds that threshold, then you’ll be liable to pay tax. In addition to this, if you give a gift to a family member, and then you pass away during a certain period of time, your family member might be subject to paying inheritance tax.
The amount of money you can give as a wedding gift depends on your relationship to the bride and groom.
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If both you and your spouse are permanent residents in the UK, you are legally allowed to gift as much as you want during your lifetimes with zero tax implications. Gifting to other family members will be subject to tax if the gift exceeds the £3,000 yearly allowance.
Under current UK law, if you gift part of your estate to a family member and then pass away in the next seven years, they will be liable to pay inheritance tax. Currently, any estate worth less than £325,000 won’t be hit by inheritance tax. If your gift surpasses that value, the amount of inheritance tax to be paid then depends on when you pass away in those seven years. This is known as taper relief, and the table goes as follows:
You can help your family members avoid paying inheritance tax if you write your life insurance policy in trust. This means that the payout from your policy is detached from your estate. This is especially useful if your estate would exceed the £325,000 threshold. Many insurance companies offer this service for free.
Writing your life insurance policy in trust will also allow you to have better control of the payout, and it will help your beneficiaries receive the payout sooner since it won’t have to go through a probate process. Many people use this service as a way to leave a family member or loved one a lump sum as an inheritance after they pass away.
You’ll only need to notify HMRC if your gift exceeds the £3,000 annual allowance. You’ll also be liable for inheritance tax if your estate is worth more than £325,000, so consider your options if you plan to leave part of your estate to a family member.
Anyone can gift a property to a family member tax-free if it doesn’t exceed the inheritance tax threshold. If it exceeds the £325,000 value and you were to die within the seven years, the beneficiary would then be required to pay tax.
A great way to protect your beneficiary from this inconvenience is to take out a short term life insurance policy covering the seven years. Then, if you did pass away, the payout from your policy could be used to cover the inheritance tax.
You should also write your life insurance policy in trust so that it doesn’t count towards your estate. This means that the payout your beneficiaries receive is tax-free and can be used to cover other expenses, such as a mortgage, living costs, or other debt payments, such as credit cards.
You don’t pay any tax on gifts made to charity, amateur sports clubs, political parties, universities, and museums.