Tax Implications on Gifts

At a glance: no taxes are due on gifts if you continue living for 7 years after gifting them, with the only exception being if that gift was given as part of a trust. This is referred to as the “7-year rule” in the UK.

However, if you pass away within 7 years after giving the gift, Inheritance Tax is applicable, and the subsequent tax amount depends on the how long ago you gave it. Similarly, gifts given within 3 years prior to your demise are taxable at 40%, while any gifts given 3-7 years prior to your demise are taxable on a sliding scale, referred to as ‘taper relief’.

Is this generally confusing at first glance? It may be but understanding tax implications on gifts in the UK is not all that complicated.

How tax laws are devised on giving gifts

Inheritance Tax may be applicable after your demise on some of the gifts you’ve given. For instance, gifts given less than 7 years before your demise may be subject to tax depending on multiple factors:

  • When the gift was given
  • To whom it was given to and their relationship with you
  • The underlying value of the gift

With that said, it is usually best to seek the advice of an accountant to better understand what kind of gifts can be given away tax-free during your lifetime.

It’s also important to understand what constitutes as a gift:

  • Cash/money
  • Personal and/or household goods such as jewelry, watches, antiques, furniture, etc.
  • Property, land, buildings, a house or flat, etc.
  • Shares and stocks which are actively listed on the London Stock Exchange
  • Unlisted shares which you held for less than 2 years prior to your demise

With the above out of the way, a gift may also be in the form of any losses you incur when selling away an item which is less than its market value. For instance, if you sell your home to a family member, such as your oldest child, for an amount which is less than the current market value, that ‘difference in value’ will count as a gift.

However, anything you decide to leave in your Will – will be treated as a part of your estate, and not count as a gift.

Tax implications on gifts: When is Inheritance Tax not due?

Some gifts are fully exempt from Inheritance Tax. For instance, gifts exchanged between spouses/civil partners are not subject to tax. However, keep in mind that these gifts can be exchanged tax-free as long as you are:

  • Living in the UK as a permanent resident
  • Legally married to your spouse or in a civil partnership with them

Any gifts given to charities or political parties are not subject to Inheritance Tax either.

Allowances for giving away tax-free gifts

Each year, as a UK resident, you can give away money and/or possessions absolutely tax-free. However, the amount which is tax-free is governed by the kind of allowances you use. For example:

During your lifetime, you can avail an annual gift allowance of £3,000, otherwise referred to as your annual exemption. So, this essentially allows you to give away gifts in the form of cash or assets which total up to no more than £3,000 per tax year – without any of it added to your estate’s value (for Inheritance Tax purposes).

Any part of the annual exemption (which you haven’t used) can effectively be carried forward to the next tax year, although it can’t be carried further beyond that. Certain gifts, however, are not included in this annual exemption and, as such, there’s no Inheritance Tax on them.

So, what we derive from this is that any gift or gifts with a collective value of over £3,000 during any given tax year is subject to Inheritance Tax.

What other gifts can be given away tax-free?

Any gift which is priced under £250 is tax-free – you can give as many of these gifts as you like and to as many people as you want. But there’s a catch: these gifts may not be given to any individual who has already received a gift that has utilised your entire £3,000 annual exemption.

It is always best to treat your annual exemption for giving gifts and the 250-pound small gift allowance separately, ensuring that in both cases, you remain tax-free.

When it comes to giving a gift to someone who is getting married or about to enter a civil partnership, certain conditions apply. In this case, you can give a tax-free gift each year as long as it is:

  • £5,000 given to a child
  • £2,500 given to a grand child or ‘great’ grandchild
  • £1,000 given to any other individual

If you’re giving gifts to the same individual only, then you may combine the above wedding gift allowance with any other allowance you wish – except for the 250-pound small gift allowance.

For instance, you may give your child a wedding gift that’s worth £5,000 as well as a gift worth £3,000 using your annual exemption for the tax year. In both cases, you will remain tax-free.

If you’re giving any gifts to help a child aged under 18 with general expenses or with college tuition, or an elderly relative or ex-spouse meet their living costs – then all of the above may be exempt from tax.

Finally, if you have surplus income which is left over after your “standards of living” have been met, you can use the surplus income to give away gifts. This could be anything from paying a life insurance premium for your spouse/civil partner to paying regularly into your child’s saving account. However, to enjoy tax exemption on the above, you must keep proper records of the gifts, otherwise Inheritance Tax may be due after your demise.

The rules for this specific exemption can be a little complex too – for instance, the gifts must be given regularly to be exempt from tax.

Other gifts to staff and clients

Christmas gifts for staff if is not more than £50 per employee, is not cash or cash voucher,  and is not part of their contractual terms or a reward for work done, then there is no tax issue or benefit in kind. Otherwise, if these conditions are not met, then the whole gift is taxable.

Christmas gifts for clients

Any kind of ‘client entertaining’ is not allowable by HMRC for tax purposes. Unless the gifts are for advertisement or promotion and is not food or drink – where the company logo and/or branding is clearly printed or displayed on the item and not just the gift wrapping. Typical examples include diaries and notepads, pens, mouse pads, company t-shirts, etc. then such gifts are tax allowable.

In any case, it is always best to consult an accountant to fully understand tax implications on gifts.

HMRC guidance on the subject on can be found here:

Published On: December 30th, 2021 / Categories: News /

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