It’s common for parents and grandparents to provide large cash gifts to help reduce future inheritance tax liabilities. However, the 7-year rule applies to gifting, so it’s important to know the rules when receiving lump sums from family members. So, what are the tax implications of receiving a gift? We look at the potential inheritance tax liability.
Firstly, if you have recently received a large cash gift or lump sum, then you would not usually be liable for income tax. The only exceptions would be if the funds generate interest or dividends. As well as money, a ‘gift’ could include property, stocks and shares, and valuable items such as antiques, jewellery and furniture.
In certain circumstances, capital gains tax (CGT) might apply – for example, if a valuable gift was sold and there was a significant gain. However, although CGT could apply to gifts given to family members, it wouldn’t apply to spouses or partners.
Inheritance tax, however, could apply to large lump sums given from a parent or grandparent if they were to die within 7 years of giving the gift. It’s important to make sure your parent or grandparent keeps records of any gifts, especially if you are an executor for their estate.
Inheritance tax – lump sums
Inheritance tax (IHT) liabilities will depend on the value of the gift, who gave it, and when it was given. In the UK, there is a £3,000 annual gift allowance that enables people to gift money without being added to the value of an estate. It doesn’t matter if this amount is given to one person or split between multiple people. However, when people give cash gifts higher than the £3,000 annual exemption, then the 7-year rule applies.
Let’s explain how this works:
If you received a £400k gift from a parent, then for the next 7 years there would be a potential IHT liability on your parents’ estate. If your parent passed away within 7 years of offering this gift, then IHT would apply to estates worth over the £325,000 tax-free threshold.
The amount of IHT you would pay will depend on the date of the gift, due to a sliding scale called ‘taper relief’. Therefore, it might be prudent to keep 40% of a large sum accessible for this time period in case you need to pay the IHT bill.
Gift allowances
Along with the £3,000 annual allowance, there are various other gift allowances:
- Small gift allowance – You can receive £250 from a family member as many times as you like, for example, as birthday and Christmas gifts. This is only applicable if another allowance hasn’t been used on the same person.
- Wedding gift allowance – On top of the £3,000 annual gift allowance, there’s an additional allowance available for those paying towards a wedding. You can receive up to £5,000 from a parent or £2,500 from a grandparent towards your wedding costs. You can also receive £1,000 from any other person to help with wedding costs. These IHT-exempt gifts apply to both marriages and civil partnerships.
Wealth Management, Nottingham
Have you recently received a significant cash gift from a parent or grandparent, and you need inheritance tax (IHT) advice? IHT can be complicated, especially if you have received varying gift amounts at different times over the past few years. The tapered relief scale can also be challenging to work out. If you need to check IHT, please speak to our financial planners.
At Balance: Wealth Planning, we can advise you on IHT and tax-efficient ways to minimise the tax liabilities on your family’s estate. We have the knowledge and expertise to help you manage your wealth, so you can enjoy your cash gift without worrying about the tax burden. Our team will look at suitable ways to reduce future tax payments, such as gift exemptions, trusts and life insurance policies. It’s our aim to help you protect your family’s legacy.
If you’ve received a significant cash gift, and you need inheritance tax advice, get in touch to speak to our financial planning team.
Sources:
https://www.gov.uk/inheritance-tax/gifts
https://community.hmrc.gov.uk/customerforums/pt/479ac481-432d-ee11-a81c-000d3a8751e3
https://www.standardlife.co.uk/articles/article-page/financial-gifts-grandchildren
