How to best gift your assets to your loved ones

We often get asked about how to manage gifting assets and more often than not, our advice is to take the little and often approach. It’s an approach that works best when you want to make sure you don’t give away too much too soon, which seems sensible.

Outside of pensions (which can only be gifted at death), property tends to be the largest asset in your estate and what people often focus on when it comes to gifting. But gifting smaller assets should not be overlooked – over time these build up and are a very worthwhile way of gifting. You can gift out of income, or excess income, which is really helpful, as this won’t attract the eye of HMRC. So let’s take a closer look at the options available to you…

Using allowances to give tax free gifts

Each tax year, you can give away money or possessions free of Inheritance Tax. How much is tax free depends on which allowances you use.

Annual Exemption

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 the full amount to just one person or split it between several people and can carry any unused annual exemption forward to the next tax year – but only for one year. The tax year runs from 6 April to 5 April the following year.

Small gift allowance

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. Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax.

Gifts for weddings and civil partnerships

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 giving gifts to the same person, you can combine a wedding gift allowance with any other allowance, except for the small gift allowance.

For example, you can give your child a wedding gift of £5,000 as well as £3,000 using your annual exemption in the same tax year.

If you make regular payments

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 and you pay from your regular monthly income.

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

  • paying rent for your child
  • paying into a savings account for a child under 18
  • giving financial support to an elderly relative

If you’re giving gifts to the same person, you can combine ‘normal expenditure out of income’ with any other allowance, except for the small gift allowance.

For example, you can give your child a regular payment of £60 a month (a total of £720 a year) as well as using your annual exemption of £3,000 in the same tax year. Some parents use the annual gifting allowance to put monies into either an ISA or pension plan for their child which is a tax efficient way of putting monies aside for their future and (you may have guessed it) will benefit hugely from compound interest.

Yes there are other structures that you can put in place to help with gifting, such as setting up trusts or family investment companies. These structures will require advice and you may incur fees. Using the gifts allowances is  just a sensible way of using your allowances without incurring additional costs.

And finally….the seven year rule explained

No tax is due on any gifts you give if you live for 7 years after giving them – unless the gift is part of a trust. This is known as the 7 year rule.

If you die within seven years of giving a gift and there’s Inheritance Tax to pay, the amount of tax due depends on when you gave it.

Gifts given in the three years before your death are taxed at 40%. Gifts given three to seven years before your death are taxed on a sliding scale known as ‘taper relief’.

Taper relief

Years between gift and deathRate of tax on the gift
3 to 4 years32%
4 to 5 years24%
5 to 6 years16%
6 to 7 years8%
7 or more0%