Simon Hurren, Private Client Associate Partner, explains what you need to know if you’re thinking of giving large sums of money as gifts.
As high inflation and the cost-of-living crisis continue to affect many people, it is tempting to give large cash gifts to friends or relatives to help them to manage. Whilst for most people the cash presents they give are very unlikely to have any tax consequences, if you are thinking of gifting larger sums of money, there may be some tax considerations which shouldn’t be overlooked.
If you are planning substantial cash gifts, the first considerations are the potential Inheritance Tax (IHT) and Capital Gains Tax (CGT) implications. As far as IHT is concerned, there are a number of reliefs and exemptions, but perhaps the most useful in this context is the £3,000 annual IHT exemption. This exemption means that you can give away cash or assets up to the value of £3,000 each year, without any IHT implications. If you haven’t used the previous year’s exemption, then that can be used too.
Capital Gains Tax (CGT) doesn’t come into play where the gift is cash, or where a new item is purchased and gifted before its value has had a chance to change. This should cover the vast majority of gifts. However, if you are gifting perhaps a family heirloom, the value of which may well have changed since you acquired it, then a potential capital gain (or possibly even a capital loss) could occur.
As with IHT, there is also an annual exemption for CGT, which is currently £12,300 for individuals, in addition to a number of other exemptions which apply to particular circumstances. Any gains falling into this annual exemption are currently exempt from Capital Gains Tax, but it is important to note that capital gains can still arise on assets which are gifted rather than sold. It is also worth noting that the annual CGT allowance will be reduced to £6,000 from April 2023.
Finally, and perhaps now more than before, many of us have been thinking of others less fortunate than ourselves, and many people will make charitable gifts. Where an individual who pays tax at 40% or 45% makes a charitable donation, tax relief at that individual’s highest marginal rate should be available. Basic rate (20%) taxpayers do not receive any fiscal benefit from making a Gift Aid donation, but if the donor doesn’t pay tax, then a tax charge is likely to arise as a result of making one. Couples where one person pays less or no tax should therefore consider which of them should make the donation, so that both you and the charity benefit from it.
If you are considering making substantial gifts in excess of the £3,000 exemption this year, then it might be a good idea to take some professional advice, particularly if these gifts are part of a strategy to reduce an estate for IHT. Estate planning, and the making of gifts is a complex area, and our specialists are happy to have an initial no cost, no obligation meeting with you to determine whether your situation might benefit from some professional advice.