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Majority unaware of gifting rules and inheritance tax

Only one in four people making financial gifts are aware of the risks of inheritance tax (IHT), highlighting the risk of unexpected tax bills for gifters for non-compliance

New research from the National Centre for Social Research (NatCen) and the IFS shows that there is a staggering lack of awareness of the gifting rules, liability for inheritance tax and the risk of making financial gifts without considering tax rules, which can kick in for any gifts over £3,000 in value in a given tax year.

Only 25% of gifters were described as having a ‘working knowledge’ of IHT rules while fewer than half (45%) of gifters reported being aware of IHT rules or exemptions when they gave their largest gift. However, despite knowing about the tax liability, most respondents did not equate gifting with inheritance tax, and said it did not affect their gifting behaviour. Only 8% of all gifters considered the tax rules before making a financial gift.

For those who were aware of the IHT rules, 54% said this influenced the value of their largest gift, and on the whole these respondents came from more affluent taxpayers, with assets of £500,000 plus. Below this financial threshold there was very limited knowledge of the longer-term reach of inheritance tax, the seven-year rule or annual limit on gifts, although only 9% of the wider population have enough assets to actually have to pay IHT.

The report stated: ‘The extent to which gifters reported their largest gift being influenced by IHT rules and exemptions only varied significantly by wealth, with 15% of gifters with a total wealth of £500,000 or more reporting their largest gift being influenced by IHT rules and exemptions, compared to 5% of the rest of the population.’

Over half (56%) of respondents said they planned to leave an inheritance, with 15% sure they would not, and 29% said they did not know.

But the share of givers is a small element of the population. Only 12% of people have made gifts, with the obvious split between those who were older and more affluent giving the most – those aged 60 or over gave a median total of £4,000, compared to £3,500 for those under 60. Older people were more likely to give a higher total value of gifts, with 12% of gifters aged 70 or over giving a total of £20,000 or more in the last two years.

When it comes to where the money goes, one in 10 made donations to charity, while the majority of the gifters gave to individuals (80%) with the most common beneficiaries being adult children with over half of respondents giving to this group, while 15% gave to parents, siblings, grandchildren and partners and nearly as many to friends (14%).

When IHT rules were considered, it did not appear to deter financial gifts, with the most popular reasons for gifting being presents for birthdays and weddings, and passing on of savings, money and assets, least likely to be affected by considerations about inheritance tax, although the latter could be the most likely to garner the interest of HMRC.

Tax rules

Gifts valued at less than £250 individually, totalling less than £3,000 per year, or to help with certain people’s living costs are exempt from IHT. Most gifts made by an individual, to another individual, during their lifetime, will be exempt from IHT unless the donor dies within seven years of making the gift. Such gifts are known as potentially exempt transfers (PETs).

The current starting threshold for IHT for a single person is £325,000, and £650,000 for married couples and civil partners, who have the added benefit of the residential nil-rate band which gives them an additional £150,000 each of tax-free property-based inheritance as of 6 April 2019. The allowance is set to rise to £175,000 from 6 April 2020.

This additional tax relief, which is only available when assets are passed on to children, was the way the Conservative government could its pledge to raise the IHT threshold to £1m, first announced by then prime minister David Cameron in 2015.

A failed PET is taxed on a sliding scale known as ‘taper relief’. This means that where the gift was given less than three years before death, tax on the gift is charged at the full rate at 40%, reducing to a taxable rate of 8% if the gift is given six to seven years before death.

With many families facing potentially punitive care costs for family members, it is important to note that there are very strict rules on property transactions. While a gift given more than seven years before death is not normally counted towards the value of the estate, this is not true where a gift is subject to a reservation of benefit.

This means, for example, if an individual gives away their home to their children and continues to occupy it rent-free, the property is treated as forming part of the individual’s estate immediately before their death for IHT purposes.

The study was conducted by the National Centre for Social Research (NatCen) in collaboration with the Institute for Fiscal Studies (IFS), and involved several strands of research, the first to identify the incidence of gift giving with a representative sample of 2,090 adults in the UK, followed by specific research among 947 gifters about their gifting behaviour, and awareness of IHT rules.

Lifetime gifting: reliefs, exemptions and behaviours research issued 17 May 2019

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