For many individuals in the UK, gifting to grandchildren is an opportunity to reduce their tax burden. But before entering into any gifting arrangement, it is crucial to understand the various tax considerations that come with it.
We discuss some of the tax implications of gifting to grandchildren in the UK.
Inheritance Tax implications
UK Inheritance Tax (IHT) applies when an individual passes away and leaves assets or property worth more than £325,000 (known as their “nil-rate band”). If you exceed this limit, IHT will be due at 40% on anything above this threshold. One way individuals can reduce their liability for inheritance tax is by gifting some of their assets or property to grandchildren during their lifetime; this could help them stay within the nil-rate band. However, there are a few things that need to be taken into account when considering making these gifts:
Gift exemptions
The first thing to consider is whether any gifts qualify for one of the gift exemptions available under UK law. These exemptions include gifts made out of income (up to £3,000 per year), small gifts up to £250 per person per year, and wedding or civil partnership gifts up to certain thresholds depending on the relationship.
You must understand if exemptions apply before making any gifts as this could significantly reduce your IHT liability.
Lifetime gifts
Another consideration is that your gifts must be irreversible and absolute. You can not reclaim them afterwards or give them with conditions or strings attached.
Even if something qualifies for a gift exemption, you must report them on your annual self-assessment form. You should check all relevant rules and regulations before proceeding with large-scale gift arrangements.
Gifts with reservation of benefit rules
Finally, it’s important to note that certain types of lifetime gifting may fall under gifts with reservation of benefit rules, meaning they are not exempt from IHT and may still need to be declared on your self-assessment form each year.
For example, if you gift a property but continue living in it as your primary residence, this would likely fall under these rules. Despite giving the property away, you would still encounter an IHT liability for any value over the nil rate band.
Therefore, you must take professional advice before entering into any complex gifting agreements, as there could be significant tax implications if not done correctly.
Gifting assets or property during your lifetime can offer significant advantages when reducing your Inheritance Tax burden in the UK – but only if done correctly and within all applicable laws and regulations. Therefore, anyone considering such arrangements must take professional advice beforehand to understand all relevant tax considerations and remain compliant.
If you are looking for advice on inheritance tax, our tax team handles complex IHT matters for our clients. Get in touch for a free consultation with our senior team.
