When Is A Gift Not A Gift….?

With Christmas less than a fortnight away, those that celebrate will fall into one of two categories. You might be really organised and have your presents bought, wrapped and already under the tree – or you might still be trying to decide what to buy!

The tradition of giving presents at Christmas has roots that go back as far as the Nativity story whereupon the Three Wise Men gave gold, frankincense, and myrrh to baby Jesus. Others would say that the tradition was started by Saint Nicholas who was left a large inheritance when his parents died, which he gave away to those more needy.

Giving gifts of toys, jewellery, or aftershave at this time of year is one thing, but if you’re considering gifting money from your estate to your family or friends, maybe to help them with buying a property or perhaps to reduce any future Inheritance Tax bill, then there are specific rules and factors to consider, as sometimes being too generous can have its drawbacks.

Nowadays, giving a helping hand financially is something that most parents and grandparents want to do for their children and grandchildren. Making gifts during your lifetime reduces the value of your estate and as such can reduce the amount of Inheritance Tax that may be due after death.

There are a few ‘lifetime gifts’ that you can make that are immediately free from Inheritance Tax:  Any gifts made to your English domiciled spouse or to UK registered charities are tax free. You can give up to £3000 away each tax year either as a single gift or as several gifts added together, and you can also use any unused allowance from the previous tax year.  Small gifts of up to £250 each can be made to as many people as you wish as long as no other gifts were made to them, and larger amounts can be gifted on marriage; up to £5000 from a parent; up to £2500 from a grandparent and up to £1000 from anyone else.

You are also able to make gifts out of your income as long as this is a regular payment, and you are able to maintain your usual standard of living.

For other lifetime gifts to be successful in mitigating Inheritance Tax certain conditions must be met. If you survive seven years after giving away any asset (including money in excess of the amounts explained above) and you have not continued to benefit from the asset, then the gift will be exempt from Inheritance Tax. If you fail to survive seven years but manage to survive three or more years after the gift, then any Inheritance Tax that needs to be paid may be reduced on a sliding scale.

The rules surrounding gifting and Inheritance Tax are complex and there are a number of matters to be wary of.

It may be that if you give away an asset but later require care, the Local Authority may allege that you deliberately deprived yourself of those assets in an attempt to avoid paying care fees.

Families frequently contact me because they want to transfer their family home into the names of their children, to avoid future care fees or reduce any Inheritance Tax that may be due.  As already stated, it is very likely that the Local Authority would consider this to be an attempt at deliberate deprivation of your assets and they would treat you as if you still owned the property when assessing what you need to pay.

Likewise, if you put your house in your children’s names but continue living in the house (and therefore continue to benefit from it) when you die the whole value of the property would still be included in your estate for Inheritance Tax purposes.  And if your children don’t live in the property then when it is eventually sold they could be subject to Capital Gains Tax, if the value of the property has increased since the transfer.

Other matters to consider include the consequence of transferring your property to a child who then may be made subject to a bankruptcy order or may become unemployed and forced to sell the house to release the capital. If married, whilst your child may seem to be in a stable relationship, what would happen if they decided to divorce? The house would then form part of the divorce settlement and you could be left without a roof over your head!  Similarly, what if your child predeceased you and left the house to their spouse who subsequently remarried?

Whilst you may be full of good intentions when making gifts to your loved ones, it is important to seek professional legal advice so that your kindness and generosity doesn’t lead to disappointment and despair.