Gifts out of income

Gifts are a great way to reduce or avoid unnecessary inheritance tax when looking to pass on assets to your children or other members of your family when you pass away.

However, these types of gift – and figuring out how to give them in order to keep inheritance tax to a minimum – can seem complex. At Equilibrium, we can help to make sure that as much of your estate as possible is passed over to your family.

What is a gift?

In this context, a gift is classified as anything that has a value – such as money, possessions and property – or a loss in value when something is transferred. For instance, it is counted as a gift if you sell your house to your child for a sum lower than its value, with them benefiting from the difference. For these gifts, which count towards the value of your estate, there is a requirement to pay inheritance tax provided you are giving away more than £325,000 and you die within seven years of doing so.

The seven-year rule means that if you do not pass away until at least seven years after making a gift, there will be no inheritance tax to pay. If you die within three years after giving a gift, the amount over £325,000 will be taxed at 40% and will be on a sliding scale thereafter, hitting 0% when you reach seven years or more.

Which gifts are exempt?

For gifts that you make out of your own income, such as presents given for birthdays or at Christmas, you are usually not required to pay any inheritance tax and these are referred to as ‘exempted gifts’.

There are also other exemptions that you can benefit from in relation to gifts. These include:

• Giving away £3,000 worth of gifts each tax year (referred to as your annual exemption) without them being added to the value of your estate
• Giving away wedding or civil ceremony gifts of up to £1,000 per person each year. This rises to £5,000 for a child and £2,500 for a grandchild
• Giving to charities or political parties
• Helping others to pay their living costs, such as a child under the age of 18 or an elderly relative
• Giving small gifts of up to £250 per person in a tax year, provided that same person has not benefited from another of your exemptions that year

It’s worth noting that, if you didn’t use your £3,000 allowance one year, you can roll it over to the next year, meaning an allowance of £6,000 – of course, you can only roll this over by one year. After that, it’s gone.

Get in touch

Our friendly experts have helped many people to successfully give gifts to help keep the level of tax payable to a minimum. Find out how they can help you to make the most of your wealth by filling in the form at the bottom of this page.