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Cash gifts for Inheritance Tax

8 February 2019

Private Client Tax

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Inheritance tax can be quite complex and difficult to navigate, with a variety of rules to adhere to. In this article we explore these rules in terms of cash gifts and break down the processes.

What could cause an inheritance tax consequence? 

Broadly, if you give something away to another individual and then live for 7 years, you can forget about any inheritance tax consequences of making the gift. If you die within the 7 years after making a gift, then there may well be inheritance tax consequences, but there are some useful exemptions for cash gifts.

What are the exemptions?

Each individual has an annual exemption of £3,000. This is not specific to cash gifts, but it does mean that for inheritance tax purposes, the first £3,000 each year can be ignored. 

The next exemption is the “small gifts” exemption. This is of amounts up to £250 in any tax year and is designed to ensure that you don’t have to worry about Christmas, birthday and any other incidental gifts. The total can be up to £250 to any individual in any tax year.

Moving up the scale, we have gifts for marriage or civil partnership. The gift must be to one of the parties to the marriage or can be into trust for them. Parents can give up to £5,000 each, remoter ancestors can give up to £2,500 each and anyone else can give up to £1,000 each.

The final exemption to mention is what is known as normal expenditure out of income. This exemption enables a person to give away surplus income provided that it is done regularly, e.g. annual or quarterly gifts out of what is surplus income and their standard of living is maintained. This is a very useful exemption because whilst it does not decrease an individual’s capital, it does help to prevent it from getting bigger. A record of such gifts should be kept.

A final gift

The final type of gift to mention is the potentially exempt transfer; these are for gifts to other individuals that do not fall within any of the exemptions above. For those gifts, the individual must survive the gift for 7 years to escape inheritance tax consequences. A record of such gifts should also be kept.

This blog is intended to give a quick overview of the relief for cash gifts and is not intended to be a comprehensive briefing on inheritance tax. For more information or advice please contact me on the details listed above or by submitting and enquiry.