Q: Every year I pay for my eldest son and his two boys to go on holiday over Christmas, with the cost being around £2,500 each year. I was recently telling a friend about this, when he suggested that I should be declaring this amount to the tax office as it is subject to “gift tax”. I have never heard about this and my son advised me that I shouldn’t do anything. Could you please tell me what gift tax is and whether I should be worried.
A: It is often assumed that there are immediate income tax charges upon gifting money to individuals, but this is not the case. Usually gifts made by individuals to friends or relatives fall into the rules of inheritance tax (IHT). These rules govern the charge that arises on an individual’s estate when they die as well as any transfers of value or “gifts” that are made during lifetime.
Subject to certain allowances and time limits, gifts are added to your estate upon death and are subject to tax if the value of your estate is above the IHT threshold or “nil rate band” (currently £325,000).
Each year, you have an annual IHT allowance of £3,000 worth of gifts. If you have not used your allowance for the previous tax year, then you can also make use of the allowance in the current year allowing gifts of up to £6,000.
There are other exemptions available for making gifts without any IHT implications:
• Small gifts up to £250 per person per year
• Parental gift of £5,000 on marriage or civil partnership
• Gift of £2,500 by grandparents on marriage or civil partnership
• £1,000 for other marriage or civil partner gifts
• Gifts made during your lifetime that are over the allowances would be classed as a potentially exempt transfer or “Pet”. These gifts will not be included within the value of your estate for IHT purposes providing you survive seven years from the date of gift. Therefore if you made a gift in December 2006, providing you lived to at least December 2013 the gift would not be included in your estate for IHT purposes.
It is also possible to utilise the IHT exemption for making gifts out of surplus income, as long as this does not impact your standard of living and the gifts can be proven to be regular. If this is the case, the gifts would be exempt and would not utilise your annual allowance or be classified as a Pet.
So as you can see, if you are able to demonstrate that the payment is from surplus income there would be no tax implications on the annual gift to your son. Failing that, then the gift would utilise the annual exemption of £3,000 available to you and again there would be no immediate tax consequence.
There is no requirement to notify HM Revenue & Customs when the gifts are made. However, it would be useful to keep a record of these gifts to show they are utilising your allowances or are out of surplus income.
If you wish to make further more substantial gifts in future, or you are planning to leave gifts in your will, then it is possible to review the use of the allowances available to you, in particular the amounts that could be gifted to use your nil rate band (£325,000) before IHT is charged on your estate.
• Neil Mitchell is a partner at Mazars
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