How do I gift tax-free sums to my children, and can they be backdated?

Lisa Vaughan
5 May 2017

Q

I understand that I am allowed to gift £3,000 tax-free to each of my children every year. My question is: how should this be done so that it isn’t viewed as income that they need to pay tax on?

Also, am I correct in thinking that as no gift was made last year I can therefore gift £6,000 this year?

From
CHS/Staffordshire

A

If you make an outright gift to an individual and then pass away within seven years, the gift amount may be added back into your estate and considered for inheritance tax (IHT) purposes. IHT is only payable if your estate is worth more than £325,000 when you die. If no inheritance tax is due on the estate, then no tax would be payable on the gift.

Some cash gifts are exempt from inheritance tax, regardless of the seven-year rule. These include the annual gift exemption of £3,000 a year. However, this is not per child, it is the total that you are allowed to gift – for example, if you have three children you could give them exempt gifts of £1,000 each, every year. You are correct in thinking that you could gift an exempt amount of up to £6,000 this year if you did not use your annual exemption in the previous tax year. A married couple could therefore gift a combined exempt amount of £6,000 a year, or £12,000 if no gifts were made in the previous tax year.

There are also exemptions for small gifts. You can give up to £250 each to as many people as you like in any one tax year. However, you cannot give a larger sum and claim exemption for the first £250 and you cannot use this allowance together with any other exemptions when giving to the same person.

Wedding gifts are also exempt. Each parent can give £5,000 to each child. A grandparent can give each grandchild £2,500, and anybody else can give the newlyweds £1,000.

Spouses can give each other as much as they like, providing both live in the UK.

A lot of people do not realise that regular gifts made as part of your normal expenditure can also be exempt from inheritance tax. So, if you wanted to be even more generous, you could consider gifting on a regular basis from your income, provided your income comfortably supports such gifts.

Be aware though, regular gifts from expenditure would be closely scrutinised on death by HMRC, so it is important that you maintain records of regular gifts made, your net income and expenditure.

In terms of documenting one- off gifts for tax purposes, many of my clients give their children a letter at the same time as making the gift payment. If you did write a letter, you may wish to include key details about the gift being made, such as the amount, date, that it is a non-repayable gift, and be clear about who is actually making the gift. This would be an adequate record for your children to be able to evidence that the funds are a gift and not taxable income.

I would also advise you to keep a copy of this document for your own records to evidence your gifts and annual exemptions.

Moneywise adds: Inheritance tax – who pays what?

If you have an estate worth more than £325,000 upon your death then inheritance tax is levied on the value above that threshold. So, if you are worth £400,000, then tax would be due on £75,000.

From 6 April 2017 you also have an additional nil-rate band that applies to
your main residence in the case of your direct descendants, such as children or grandchildren, inheriting the property or a share of it. This was introduced this year with a limit of £100,000.

So if your estate is above the inheritance- tax threshold and part of that estate is a residential property, you get an additional £100,000 allowance that can be used against the value of the property. This will increase to £125,000 in the 2018/19 tax year and continue to rise each year until it hits £175,000 in the 2020/21 tax year.

Inheritance tax is levied at a rate of 40% in most cases. The only exception to this is if you donate at least 10% of your estate to charity, then the rate falls to 36% on some assets.

Although there is a lot written about inheritance tax, and many of us worry about it, in fact very few people pay it. The Office for Budget Responsibility estimates that 7.1% of estates paid inheritance tax in 2015/16.