Gifts: a taxing issue

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That wise, old/long-dead sage, Seneca, once philosophised (as philosophers are wont to do) that "a gift consists not in what is done or given, but in the intention of the giver or doer". Clever chap though he was, Seneca was clearly not well-versed in UK inheritance tax law (for which we can probably forgive him seeing as he pre-dated it by well over a millennium).

If we put aside that infamous example of the Trojan Horse bestowed upon Troy, gifts are generally the product of altruism. In that much, we can agree with Seneca. Yet, in UK law, a gift for the purposes of calculating inheritance tax is defined by what is given. Sorry Seneca – hither we must perforce parteth ways.

So, what is a gift for the purposes of inheritance tax law?

A gift (known as a 'potentially exempt transfer' or 'PET') for the purposes of inheritance tax is a transfer of anything of value for no consideration, made in the seven years before the death of the donor. The general position is that any gifts made more than seven years before the date of death do not use up the individual's inheritance tax threshold (currently £325,000).

Any one person can gift up to £3,000 every tax year through their 'annual exemption'. Unused exemptions in any one year may be carried forward but only one tax year. There are also a number of other exceptions in which some gifts are classed as tax-free: gifts to charities, certain amounts as weddings gifts, payment to help with living costs, small gifts of up to £250 to any one person, gifts to spouses or civil partners, and normal expenditure out of income.

However, to err on the side of caution, it is judicious to consider all transfers of anything of value in the seven years prior to death to constitute a gift; far better for the gift (questionable as its status may be) to be considered as such and not incur tax later on, than any gift to go potentially undisclosed.  In the case of significant gifts and/or gifts into trust, it may be necessary to count back seven years from the date of such to be certain of the position.

What happens if a gift is not disclosed?

In one word: trouble. HMRC will be far from pleased.

Although it is the personal representatives of an estate who are primarily responsible for making an accurate inheritance tax return to the Revenue, HMRC states that the recipient of a gift also has a duty to report the gift. HMRC considers that failure to disclose a gift to the personal representatives or report it to HMRC is deliberate behaviour incurring a minimum penalty of 50% of the tax undeclared and is payable by the recipient of the gift, rather than the personal representatives. This approach was followed in the recent case of CRC v Hutchings and HMRC has suggested that it will continue to use this judgement as a precedent for future cases.

How can this be prevented?

We strongly encourage donors to make contemporaneous records of the gifts they have bestowed upon others, making note of the date of the gift, its value, and the donee. We would also advise personal representatives of a deceased's estate to warn, in explicit terms, any potential recipients of gifts in the deceased's lifetime of the possible consequences of failing to disclose those gifts. Should you require any advice on this issue please contact the Succession & Tax team.