The annual gift allowance: How much can you give as a gift now without being taxed?
There are several categories of gift that are exempt from tax, as long as the gift remains within the given allowance. It is important for you to utilise these allowances during your lifetime as they will not only reduce the value of your estate, but potentially reduce your overall liability to any inheritance tax upon death.
Each individual has a tax-free gift allowance of £3,000 per annum. This means that you can give £3,000 in any one year without tax implications. Anything larger than£3,000 will be considered a ‘Potentially Exempt Transfer’ (PET) and may be subject to inheritance tax should you fail to survive seven years from the date the gift is made.
This allowance can be carried forward, for example, if you did not make any gifts in 2014/2015, your tax-free gift allowance for 2015/2016 will be £6,000. However, you can only carry it forward for one year, so it is recommended that you utilise it fully by way of making regular lifetime gifts.
You can also make small gifts of up to £250 to any one person in any one year. It is not possible to combine a small gift with another gift allowance, for example, the annual allowance as mentioned above. The gift must be made outright, for example, a birthday gift or Christmas gift.
Gifts made in consideration of marriage of up to £5,000 per parent of the couple are exempt from inheritance tax. Your gift must be made ‘in contemplation’ of the marriage and so should be so evidenced in writing. Gifts in contemplation of marriage can also be made to other relatives such as grandchildren although the amounts allowed vary.
Anything you give to your spouse is free of inheritance tax but it can also significantly reduce your liability to income tax and capital gains tax. It is important to consider this type of gift should you, for example, be paying a higher income tax rate than your spouse.
As well as the above-mentioned types of gift, normal expenditure out of income is exempt from tax. To qualify under this category, the gift must be part of your normal expenditure, it must be from your income rather than capital and you must still have sufficient income to maintain your usual standard of living. It does not need to be a series of regular payments, but it is more likely to be considered as ‘normal’ if there is evidence that payment is likely to recur.
In addition to, or perhaps instead of, a gift to family and friends, you may wish to give gifts to your favourite charity. All gifts to charity, regardless of the amount, are exempt from inheritance tax.
Should you wish to find out more about making gifts in your lifetime or by Will, please contact our Private Client team.
