Tax-free gifts

Earlier this year the government stamped out one of the most common ways to pass money to heirs when it introduced tax liabilities on certain types of trusts.

The rules surrounding how much money you can donate to whom now need to be studied even more closely to make sure your family does not get stung for too high a charge when you die.

So what limits apply on how much I can give away before I have to pay tax?

There are strict rules governing how much you can give to your family and other individuals in any one year. You can, however, donate as much as you like tax-free to charities and political parties.

You do also have certain tax-free allowances when giving to family and other individuals. The first £3,000 you gift in any one year is tax-free. On top of this, you can give up to £250 each to as many individuals as you like in any one year.

You can also give as much as you like as long as the gifts tick certain boxes. Donations that are deemed to be regular, are paid from your own income and do not reduce your own standard of living fall outside your estate for inheritance tax purposes and therefore do not incur any charges. There are not really any strict guidelines as to what constitutes a regular payment, but tax experts consider this means at least once a year.

In addition to all of this, you can make any one-off tax-free gifts, no matter how large they are, as long as you live for seven years after you have made them.

If you die within the seven year period, then the gifts you made – known as “potentially exempt transfers” or PETs – will be reviewed and tax may be reclaimed on any amount you gave away in excess of the inheritance tax threshold, which is currently £285,000.

Are there any other allowances that can help when giving money to family members?

Yes – parents can make maintenance payments to children without incurring any tax until the children reach the age of 18. There is also a legal entitlement for parents to give their own children up to £5,000 tax-free each when they get married.

If I exceed these allowances, how much will I be taxed?

Any gifts that fall outside the legal gifting entitlements – and when combined with your other assets on death take you over your nil-rate band, which is currently £285,000, may be liable for tax charges if you live for less than seven years. Tax will be charged at varying rates, depending on taper relief.

If you live less than three years after the gift was made, no relief will be gained and tax will be reclaimed at 40 per cent if the gift takes you over the nil-rate band referred to above.

If you live between three and four years after the gift was made, then 80 per cent of the 40 per cent tax rate will be payable.

And 60 per cent of the full tax rate will be payable if you live between four and five years longer, 40 per cent if you live between five and six years longer and 20 per cent if you live for between six and seven years after the gift has been made.

In addition, you should note that, until your child is 18 or has left full-time education, any interest earned on the money you give them – in excess of £100 – will be taxed as your income.

However, grandparents can give as much as they like to their grandchildren without the interest being taxed as their income.

How does the Revenue claim this money?

The Revenue can only collect tax on gifts that are declared to it by you or the executors of your will. The recipients of financial gifts should keep records and pass these to the appropriate authorities when you die.

How do trusts fit into all this?

Trusts used to be a common way to pass assets to your heirs. But this year’s Budget stamped out a lot of the benefits.

 Now, certain trusts have set up tax charges of 20 per cent on assets above the nil-rate band, as well as 6 per cent tax charges every 10 years.

What about passing on my home to my children?

It is quite common for people to try to transfer their main residence to their children while they are still living there.

This is not recommended as it is classed as a “gift with reservation” – because you still reside in the property – and it is therefore still treated as part of your estate for inheritance tax purposes.

In addition to this, if the property is in your children’s names when you die, they may also have to pay capital gains tax on the property.

What about giving to charity?

There are two main ways you can do this tax efficiently. The first is through gift aid. If you are a UK taxpayer and donate via gift aid – most charities will offer this option when you donate – then the charity can reclaim the tax on your gift.

Basically, the charity will take your donation and reclaim tax on its “gross” equivalent – that is, its value before tax was deducted at the basic rate of 22 per cent. Higher- ate taxpayers can also claim a further 18 per cent on their tax return, to make the total tax relief up to 40 per cent.

Alternatively, if you are employed, you can make donations to charity directly from your pay packet. This is known as “payroll giving”. This way you can authorise your employer to make the donation from your wages before deducting any tax.