HMRC has urged taxpayers to keep their records in order or risk a 40 percent tax bill. A taxpayer reached out to HMRC to ask the group to clarify its tax-free rules. The person asked about making a large cash gift to their child.
They set out an example of giving an amount worth less than £325,000, where they had not gifted a total of more than £325,000 in the previous seven tax years. They said they believed in this case there would be “no tax to be paid”.
Their question for HMRC was: “Do I still have to inform HMRC at the time of the donation?” The person is most likely referring to the tax-free allowances and gifting rules around inheritance tax.
You can pass on up to a certain amount in total assets when you die tax-free, with any assets above the threshold subject to a 40 percent tax bill.
One way to reduce your liability for the tax is to give away gifts, thus reducing the size of your estate that could be hit with the bill. You can give away a gift of any size tax-free, as long as you survive for seven years after the gift is given.
There are also annual allowances, which allow you to give away up to a certain amount each tax year, and these sums will not be subject to inheritance tax when you die.
Responding to the customer, HMRC said: “You don’t need to notify us at the time of the gift, but it’s sensible to keep accurate records so your executors can report it later if required.”
If you don’t keep a detailed record of your gifts, you could end up needlessly paying the 40 percent tax on an amount you have given away even though it is exempt from the levy. For example, if you gave a £10,000 gift to a relative or friend, without keeping accurate records to show the amount was a gift, your succesors may have to pay £4,000 in tax.
What are the annual gifting allowances around inheritance tax?
You can give away up to £3,000 each tax year and the amount won’t attract a tax bill. You can also give away up any number of gifts to £250 to different people, as long as you haven’t used any of your other allowances
Another opportunity to slash your tax liability is if someone you know is getting married or starting a civil partnership. You can give up to £5,000 to one of your children who is doing this, as well as up to £2,500 to a grandchild or great-grandchild, or up to £1,000 to any other person.
What are the nil rate allowances for inheritance tax?
Under current rules, an individual person can pass on up to £325,000 in total assets without paying inheritance tax. There is an additional £175,000 allowance if you are passing on your main residence to a direct descendant, meaning you could get a £500,000 allowance if you’re passing on your home.
Any unused allowances can be passed on to your spouse or partner, meaning they could pass on up to £1million tax-free if they are also passing on a main residence.