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Thinking about gifting to loved ones? Here’s why you should speak to a planner first

Throughout your life, you’ve probably seen your wealth grow by a significant amount, from your cash savings to your investments and assets. When you have enough to enjoy a comfortable lifestyle, you may have considered helping your loved ones too.


If you have children or grandchildren, you might want to use some of your wealth to give them a helping hand. With the rising cost of living and low wage growth in recent years, it can be difficult for many younger people to reach financial goals, such as buying their first home.


Of course, when it comes to gifting wealth, there may be tax implications, which is where working with a professional could benefit you. Read on to find out how financial advice can help you to gift tax-efficiently.


Financial gifts can be useful for helping loved ones to reach their goals


There are many good reasons why you might want to gift some of your wealth to loved ones, from helping your children reach life milestones to giving younger relatives the best start in life.


One of the most important ways that Brits help their loved ones financially is by acting as the “Bank of Mum and Dad”. According to data from Savills, published in the Independent, in the 10 years to 2021, parents have given £53.9 billion to help their relatives take their first step onto the property ladder.


However, gifting can sometimes present a problem when it comes to Inheritance Tax (IHT). This is because if you pass away within seven years of making a financial gift, its value could be included in your estate.


Each person has an allowance for how much they are allowed to pass on to their loved ones when they die without having to pay IHT. This is called your “nil-rate band” and, in the 2021/22 and 2022/23 tax year, stands at £325,000.


Furthermore, you can also benefit from an additional residence nil-rate band of £175,000, if you pass on your main residence to your children or grandchildren. This can boost your tax-free threshold up to £500,000.


If your estate is larger than this limit, you will have to pay 40% IHT on any of its value above the threshold.


Thankfully, there are some ways to avoid incurring any tax issues when gifting, but a surprising number of people are unaware of them.


According to research published by consumer rights group Which?, almost half of Brits are unsure about the rules regarding gifting wealth. If you want to avoid incurring any tax issues, it’s important to be able to make an informed decision.


Each year you have several allowances for how much you can gift


The “seven-year rule” is one of the most important principles to bear in mind when gifting.


Theoretically, you can give as much as you like to your loved ones without encountering any tax issues. There is just one condition to this: you must outlive the gift by at least seven years after you’ve made it.


If you pass away before this time, its value may be added to your estate for IHT purposes. However, there is a sliding scale of the tax depending on how long before you died you chose to make the gift.

The table below shows the reduction in IHT on the gift, depending on how much time has elapsed:


It’s important to note that taper relief only applies to gifts that are in excess of the nil-rate band. As you can imagine, if you don’t owe any tax because you haven’t exceeded the threshold (after cumulation), then there can be no relief.


Taper relief also does not reduce the value of the gift that is transferred, only the tax you may have to pay as a consequence of that transfer.


On top of this, you also have some useful allowances that you can take advantage of:


Annual exemption


Each tax year (6 April to 5 April), you can give away up to £3,000 worth of gifts to anyone you like. This is called your “annual exemption” and you can carry it over from a previous year up to the value of £6,000.


Small gifts


You can potentially also give an unlimited number of gifts of up to £250 each. However, if someone has already received your entire £3,000 annual exemption, you cannot give any more to them.


Wedding gifts


If someone you know is getting married, you can gift them £1,000 as a wedding present, which rises to £5,000 for children or £2,500 for grandchildren.


Working with a planner can help you to avoid running into any potential tax issues


When it comes to helping loved ones financially, the last thing you want to have to think about is running into unexpected problems. Tax laws can sometimes feel like a minefield, so if you want help navigating them effectively, seeking professional advice can be useful.


A financial planner can help you to gift in a way that minimises the amount of tax you may have to pay, which can give you much greater peace of mind.


They can also help you to keep thorough and accurate records of your gifting, such as:


  • How much you gave

  • Who you gave it to

  • When you gave it.


This information can be invaluable if HMRC ever tries to dispute a financial gift, which is why working with an expert can give you much greater confidence.


Get in touch


If you plan to help a loved one with a financial gift and want to ensure you don’t run into any unexpected issues, we can help. Please email us at info@athertonyork.co.uk or call us on 0208 882 2979.


Please note:


This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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