How Much Money Can I Gift Someone or Give Away?
We get asked by a lot of people who are confused with inheritance tax laws with the subject of how much money they can give away.
So, how much money can you give away? How much money can you give to your children?
The simple answer is you can give away an unlimited amount of money.
Talking to ‘friends in the pub’ or over dinner many people have heard of the £3,000 annual monetary gifting limit. The £3,000 annual gifting allowance is literally when you give £3,000 away, this money is immediately outside of the estate and free of inheritance tax. We have a yearly allowance and if you die tomorrow, the £3,000 is not included in any inheritance tax calculation. In addition, if you did use last year’s £3,000 allowance, you can gift £6,000 this tax year.
What if I want to give away £100,000 to give my children?
You can legally give your children £100,000 no problem. If you have not used up your £3,000 annual gift allowance, then technically £3,000 is immediately outside of your estate for inheritance tax purposes and £97,000 becomes what is known as a PET (a potentially exempt transfer).
Potentially Exempt Transfer – Gifts to People
This means the £97,000 that you gave away is potentially exempt from inheritance tax. In simple terms, if you live i.e. survive for seven years after the date that you gifted that money away, it is outside of your estate for inheritance tax purposes. This means it is not included in your estate valuation on death after 7 years. There is no tax to pay on the day that you gave the money to your children, loved ones, friends and provided you survive the seven years no tax to pay then should you then pass away now. Likewise, the person who receives the money is not subject to tax on the gift (they may pay tax if they then invest that money in their own name it subsequently generates taxable income, but that is normal).
What if I die within the seven year period?
The whole of that £97,000 is bought back into the estate. It was a PET (potentially exempt transfer) but as you have not survived the seven years it will be included in any inheritance tax calculation. Your loved ones DO NOT have to give the money back. It is simply the the value of that gift is included in your estate when calculating any inheritance tax.
What if I give away £500,000? Gifts to People
If you gift larger sums then you do need to be careful. If you gift £500,000 to your children to your loved ones – “real live people”, no problem, the £500,000 gifted is treated exactly the same way as above, the 7 year rule etc. It is a potentially exempt transfer and if you survive for seven years it is outside of the estate. If you do not survive for 7 years it is again included in the estate to calculate any inheritance tax due and given that the inheritance tax allowance threshold is currently (2015 £325,000), any the value of the estate including the £500,000 gift added back into the calculation but there will be ‘taper relief’ applied to that part of the money that was given away but in excess of the inheritance tax allowance, in this case £175,000 (£500,000 less £325,000).
The first £325,000 is subject to normal inheritance tax allowance and then the excess £175,000 that would then have something called taper relief.
Depending upon how many years you survive after you made the large gift, then a reduction in the amount of tax is applied to the excess, in our worked example the £175,000. Note: Taper Relief only applies to gifts in excess of the IHT Nil Rate Band (currently £325,000).
If you die within given periods from the date of gift there is a reduction in tax payable as follows:
- Gifts made upto 3 years before death do not qualify for any Taper Relief.
- Gifts made between 3 and 4 years before death are charged at 80% of the 40% flat rate.
- Gifts made between 4 and 5 years before death are charged at 60% of the 40% flat rate.
- Gifts made between 5 and 6 years before death are charged at 40% of the 40% flat rate.
- Gifts made between 6 and 7 years before death are charged at 20% of the 40% flat rate.
- Gifts made over 7 years before death fall outside the deceased persons estate.
Gifts to Trusts and Companies – Chargeable Lifetime Transfer
What if I give money away not to people, not to family, not to friends but if I gift money to a discretionary trusts or a company?
If you give smaller sums below the inheritance tax allowance (£325,000) then there is no immediate liability to tax. If you gift £500,000 to a trust or a limited company this becomes what is known as chargeable lifetime transfer.
The first £325,000 of the £500,000 gift is within your inheritance tax allowance and the excess £175,000 is a chargeable lifetime transfer which would then be subject to tax inheritance tax TODAY. The day that you make a gift in excess of £325,000 that would be as a chargeable lifetime transfer with inheritance tax paid upfront at half the usual rate of 40%, so 20% of £175,000 is payable in inheritance tax on day one. If you then died within seven years the balance 20% would be payable as well.
Giving money away if you need care?
If you have an immediate need for care, you cannot simply give your money away to avoid the care fees means test. If you have an illness or injury in early stages that may lead to needing care you cannot simple give your money away. The local authority, who are responsible for arranging your care could argue that you have deliberately deprived yourself of your wealth, a deprivation of assets, to avoid it being used to fund your care needs. They can then reclaim this money.
Summary for giving money away
Therefore, the answer to the question of how much money can I give away is simple:
Accepting the 'deprivation of assets' rules, do not apply to you, you can gift as much as you want to your family, to friends, to people but be aware of the seven year rule because it can be bought back into your estate if you die within seven years. Gifting money to a business or to a discretionary trust can create an immediate liability to tax at 20% (chargeable lifetime transfers rate) if you give away in excess of the inheritance tax allowance.
Inheritance tax is not a death tax inheritance tax is a transfer tax, it a gift tax, so if you give away too much away to a business or to a trust you may end up paying inheritance tax today while still alive but if you give money family and friends, you can give away as much as you want and provided you survive for 7 years, no problem but if you die within 7 years it will b included in the estate to work out any tax and if it was a large gift, some of the excess of the inheritance allowance may attract a taper relief reduction.