Christmas is the time of giving and gifts between family members and friends are one of the traditional ways of celebrating the holiday period. Whilst the tax consequences of the gifts we give may not be our first thought at Christmas, if your estate is potentially liable for inheritance tax, you should take care to structure your gifts in a way which is tax efficient, to mitigate the risk of incurring further inheritance tax.
Generally, every individual in England & Wales has a tax free allowance for inheritance tax purposes of currently £325,000 every 7 years, called the Nil Rate Band Allowance. If they own a residential property which they leave to their direct descendants on their death they may be entitled to an additional allowance of £175,000, called the Residence Nil Rate Band. Spouses and civil partners can claim the unused allowances of their predeceased spouse or civil partner, potentially taking the total allowance for married couples with children to £1,000,000.
Certain lifetime gifts can impact upon the total Nil Rate Band Allowance available on death. Each year, every person has a tax free personal (gifting) allowance of £3,000. If no gifts have been given in the preceding year, this increases to £6,000 for that year. Any gifts made cumulatively in excess of that sum become Potentially Exempt Transfers (PETs) for inheritance tax purposes. If the person who made the gift dies within 7 years of that PET, it still forms part of their estate for inheritance tax purposes.
Small gifts, of anything up to or less than £250 per person in any given tax year, are generally free from Inheritance Tax. For most people giving modest gifts to family members there may be little risk of incurring any inheritance tax liability. However, if other gifts are made to the same person in the same year which take the amount they have been given to over £250, the sum in excess will either use up some of the annual personal gift allowance, or be a PET, requiring the gift-giver to survive 7 years for it to fall outside of their estate.
The liability to pay inheritance tax on failed potentially exempt transfers falls by default upon the recipient of the gift. It is however possible to prepare a Will in such a way that passes the tax liability to the residuary estate of the deceased instead of the person who has received the gift. This means that the beneficiary who received the gift during the deceased’s lifetime would then not need to pay the tax liability themselves. Without this clause within the Will, recipients of gifts made in a person’s lifetime could find themselves with an unexpected and unwanted sometimes large tax bill!
If you require assistance with estate planning or the preparation of your Will, please do not hesitate to contact our Trusts & Estates Department, Heather Lally or Stephen Mackellar on 01244 354800 or email: Heather.Lally@dtmlegal.com or Stephen.Mackellar@dtmlegal.com.
This article is not intended to be comprehensive or to provide specific legal advice. It should not be relied upon in the absence of specific advice given in relation to particular circumstances.
