Gifting…

A teacher once said to me that sometimes the best things come in brown paper bags, and that just because something looks bland on the outside, doesn’t mean its worthless on the inside. Similarly, just because something looks shiny and well packaged, doesn’t mean it’s more valuable. Gifting can be a great way of sharing your wealth and can be immensely rewarding if used correctly. It’s a brilliant tool in our inter-generational tax planning kit bag, however, how, when and what you gift can have significant consequences.

Whilst a gift can be well intentioned, it can lead to a number of problems and not just for the person making the gift. For instance, you may have heard of the 7-year rule on gifting, in which a gift will potentially fall outside of your estate after 7 years have passed. However, few people know of the 14-year rule whereby a gift could ‘fail’ and remain inside your estate for an extended amount of time, potentially leaving your beneficiary with a tax bill upon your death. The timing of your gifts is therefore important.

It is also important to give due consideration to Capital Gains Tax when making a gift. Apart from the shock of an unexpected tax bill, it may leave the person making the gift with potentially no means of paying for it. For example, if someone was to gift a holiday home to their child, this could result in a liability to Capital Gains Tax on the growth in the value of the property but without the Settlor (that’s the legal term for the person making the gift) having the physical cash to pay it. Imagine making a gift of a holiday home and being landed with a £330k tax bill for the pleasure… not a pleasant disposal after all!

‘Gifts with reservation’ can also be a key issue in circumstances where a person may give away ownership of the property but continues to derive some benefit from it. This may result in it being deemed by HMRC to be still part of their estate, thereby negating at least some of the purpose of making the gift.

Navigating around these problems can seem like a feat of endurance. However, it’s an area of planning that DB Wood is well versed in, and we are always on hand to help our clients navigate these potential pitfalls.

It’s important not to dismiss our brown paper bag and start with some of the simple ways. In this respect our ‘friends’ at the HMRC do allow certain gifts to be exempt from Inheritance Tax.

You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’.
You can give as many gifts of up to £250 per person as you want each tax year (as long as you have not used another allowance on the same person).
Each tax year, you can give a tax-free gift to someone who is getting married or starting a civil partnership. You can give up to:
£5,000 to a child
£2,500 to a grandchild or great-grandchild
£1,000 to any other person
If you’re making gifts to the same person, you can combine a wedding gift allowance with any other allowance, except for the small gift allowance.
You can make regular payments to help with another person’s living costs. There’s no limit to how much you can give tax free, as long as;
- you can afford the payments after meeting your usual living costs
- you pay from your regular monthly income

These are known as ‘normal expenditure out of income’. They could include:

paying rent for your child
paying into a savings account for a child under 18 (for example Junior ISAs)
giving financial support to an elderly relative
Paying for children’s care fees
Gifting bond segments

One of the key takeaways is to consider the timings of your gift as well as the source of them. If you are in any doubt speak with your planning team at DB Wood. We keep a gift register, which will assist with keeping track of your gifts so they can be managed effectively and be built into your forward plan.

Many clients (and advisers) also think trusts are great for gifting…and they can be. Again, however caution is the key. Trusts are complicated and are often dressed up to look quite impressive from the outside looking in. As such they can often be misused, creating unintended consequences and charges.

Any gifts should be considered carefully and only made if your standard of living is not adversely affected and your remaining assets are sufficient for your needs. Our advice is always to take account of individual circumstances and objectives and guide you as to the most appropriate way forward. Sometimes straight forward non complicated solutions are best. Brown paper bags and all that.