The Government has stamped out one of the most common ways to pass money to heirs when it introduced tax liabilities on certain types of trusts. The rules surrounding how much money you can donate to whom now need to be studied even more closely to make sure your family does not become subject to a high charge when you die.

There are strict rules governing how much you can give to your family and other individuals in any one year. You can, however, donate as much as you like tax-free to charities and political parties.

Tax-free allowances

You have certain tax-free allowances when giving to family and other individuals. The first £3,000 you gift in any one year is tax-free. On top of this, you can give up to £250 each to as many individuals as you like in any one year.

You can also give as much as you like as long as the gifts tick certain boxes. Donations that are deemed to be regular, are paid from your own income and do not reduce your own standard of living fall outside your estate for inheritance tax purposes and therefore do not incur any charges. There are not really any strict guidelines as to what constitutes a regular payment, but tax experts consider this means at least once a year.

Parents can make maintenance payments to children without incurring any tax until the children reach the age of 18. There is also a legal entitlement for parents to give their own children up to £5,000 tax-free each when they get married.

Potentially exempt transfers

In addition to all of this, you can make any one-off tax-free gifts, no matter how large they are, as long as you live for seven years after you have made them. If you die within the seven year period, then the gifts you made – known as ‘potentially exempt transfers’ or PETs – will be reviewed and tax may be reclaimed on any amount you gave away in excess of the inheritance tax threshold, which is currently £285,000 (tax year 2006/07).

Tax will be charged at varying rates, depending on taper relief. If you live for less than three years after the gift was made, no relief will be gained and tax will be reclaimed at 40 per cent if the gift takes you over the nil-rate band referred to above.

If you live for between three and four years after the gift was made, then 80 per cent of the 40 per cent tax rate will be payable.

And 60 per cent of the full tax rate will be payable if you live between four and five years longer, 40 per cent if you live between five and six years longer and 20 per cent if you live for between six and seven years after the gift has been made.
In addition, you should note that, until your child is aged 18 or has left full-time education, any interest earned on the money you give them – in excess of £100 – will be taxed as your income. However, grandparents can give as much as they like to their grandchildren without the interest being taxed as their income.

HM Revenue & Customs can only collect tax on gifts that are declared to it by you or by the executors of your Will. The recipients of financial gifts should keep records and pass these to the appropriate authorities when you die.

If you would like to find out more, please e-mail or contact us for further information.

The value of units can go down as well as up. Past performance is no guarantee of future returns. Levels and bases of, and reliefs from, taxation are subject to change.
Article date: March 2007