Your son is struggling with his finances and has come to you for some help. You have been paying some of his household bills until he gets back on his feet. But what are the tax consequences that you and your son should consider? Inheritance tax expert Brona MacDougall provides the answers.
You may have heard the urban myth which warns people about the perils of ‘gift tax’. It’s a persistent theme but quite surprising given that gift tax doesn’t actually exist here in the UK. Generally, if you receive a gift from an individual, you will not have to pay tax on it. However, there can be tax consequences for the person who made the gift.
If you give away a lump sum or several smaller gifts to an individual, say a family member, there are no immediate tax consequences to worry about. It would be different for gifts to non-individuals such as to trusts or companies. In the longer term, gifts to an individual, say a family member, can reduce the inheritance tax (IHT) on your estate when you die.
However, because a gift to another individual doesn’t fully escape IHT until seven years have passed, you should keep records of any you make and put them with your financial records so that your executors can find them.
Not keeping the proper records could result in IHT being paid unnecessarily as the solicitor handling your estate is required to declare some types of gift made in the seven years before death. This can mean a higher IHT bill and so reduce the amount in your estate left to your beneficiaries.
The person filling in the IHT forms for your estate will check your bank statements for payments that could be deemed as gifts. To prevent these being wrongly reported to HMRC you should make sure your record of gifts includes the right information. Apart from noting the date, amount and recipient you should also indicate whether you think that it is exempt from IHT. Most exempt gifts do not need to be declared to HMRC by your executors.
The good news is that there are many IHT exemptions for gifts.
- Gifts to your spouse or civil partner
- Gifts when someone gets married (up to certain limits)
- Gifts which are regular and made from your excess income
- Gifts of up to £3,000 per tax year
The penultimate exemption can apply if you need to help someone who is in financial difficulty, such as a family member.
Gifts from income exemption
Where you make regular gifts to an individual that are less than your income and allow you to maintain your normal living standards, the penultimate exemption in the list above would apply. However, it is an exemption that HMRC scrutinises very closely and gifts to which it applies have to be declared by your executors. This makes it especially important that your records clearly show where you regularly make gifts to the same person, including such as where you pay bills on their behalf.
Your son does not have to worry about income tax as the gift is not taxable income in his hands. There are also no immediate tax consequences for you in making gifts to him. However, do keep a record of gifts you make for at least seven years. Your record should show who you made the gift to, how much it was and whether you think an exemption applies, such as for regular gifts from your income.
As we state above, in the longer term, gifts to an individual, such as to a family member, can reduce the inheritance tax (IHT) on your estate when you die.