Gifting: Why it’s worth knowing the options
Please note: The article does not constitute advice or any form of recommendation. Barclays Private Bank does not offer tax advice, and professional advice should always be sought. The article is also written with a UK audience in mind.
For people with sizeable wealth, the method of gifting (a sum of money), especially when the gift is a large one, needs to be well-considered and well-executed.
While gifting may seem like a simple thing on the surface, there are in fact a number of factors worth keeping in mind. Few of them need be blockers or deal breakers, but if they’re not given due consideration, they may come back to bite further down the line.
In this article, we explore some common themes that emerge when people are considering making a gift, both during and after their lifetime.
What’s the point?
At the risk of sounding flippant, asking yourself ‘What’s the point?’, is a great place to start with financial planning in general. And when it comes to gifting, having a clear statement of intent can make it easier to identify your next steps. Gifting is sometimes seen as a ‘go to’ Inheritance Tax planning solution, but in most instances, this will not actually be the case.
As we covered in a recent article, Is gifting all in the timing?, there are varying reasons why someone might like to make a financial gift.
Nick Bearne, a Director in our Private Bank, explains in more detail: “It’s often a lifestyle conversation that can trigger a gift idea. In those cases, it typically leads to something known as, ‘gifting at the point of need’. Perhaps you’re a grandparent wanting to cover your grandchild’s school fees, or a parent looking to give your children a leg-up onto the property ladder. The point being, you’ve identified a need and you want to help at that moment in time.”
While it might be tempting to want to hand the money over immediately, it’s important to know the consequences of doing so. At the time of writing (May 2023), UK taxation rules stipulate that no tax is due on a gift if the donor lives 7 years beyond when they give it (as long as it’s not in a trust)1. This type of gift is known as a ‘Potentially Exempt Transfer’ (PET for short).
The ‘potential’ nature is dependent on you dying within 7 years of having given that gift, then the recipient possibly being liable for tax on part of its value if the value of the gift were above the Nil Rate Band of £325,000.
If your death were to fall within the 3-year anniversary of your gift, their tax liability could be as high as 40%. It would taper down between the 3 and 7-year mark, after which the gift is fully exempt. However, there is a common misconception that all gifts benefit from taper relief, and in reality, it is only the portion above the Nil Rate Band of £325,000 that is tapered down.
As always, there are some exemptions, and the devil is in the detail which means careful consideration is needed. As an example, some tax-free allowances are granted on gifts for certain occasions, such as weddings.
Broadly speaking, if you’re towards the latter stages of your life, it’s worth reflecting on the 7-year rule. It’s also reading, Where there’s a will, there’s a way, but that’s a conversation for another time.
Important life lessons
For some families, the process of gifting can be a great learning experience for all involved. It’s a chance for the gift-makers to talk through their ideas, and encourage collaboration. If the gift recipient is within the family, then there’s also a chance for them to articulate what they might need before any gift is made.
“Each family is different,” reflects George Hill, a Wealth Planner in our Private Bank. “For some people, money conversations are part-and-parcel of life, and there’s no hesitancy. While for others, there might be a desire for formality in the discussions, or a level of discomfort might even creep in.”
With varying attitudes, are there some common insights worth knowing about gifting discussions?
“As with so many things in life, good communication goes a long way,” reflects George. “Some people like the structure of governance and may go down the family charter route. For a lot of people, however, a less formal route is preferred. Regardless of the approach, it’s an invaluable time to learn about the purpose and meaning of wealth for you. Ultimately, it all starts with a conversation.”
Paperwork might feel like a chore, but it’s vital to stay on top of it when it comes to gifting.
For those people wanting to make a gift once they pass away, it’s important to keep your Will up-to-date so that your intentions are clear to your estate executors. Having transparency in a Will about charity donations also comes with additional benefits - a donation to the value of 10% or more of your estate, can lower the Inheritance Tax bill which your beneficiaries may be liable for.
Similarly, it’s a sensible idea to maintain a ‘gift log’, capturing a record of gifts made in a lifetime. Doing this, in parallel with maintaining a valid Will, can provide much-needed financial clarity for relatives during an already-stressful period of bereavement.
And on the topic of estate planning, the role of Trusts can be useful to know about, particularly from an Inheritance Tax perspective.
“A Trust can allow a settlor to make a gift and also retain control over the gifted property by appointing Trustees,” offers George.
Although Trusts take 7 years to fall outside the estate in the same way a gift of cash does, they are also subject to a different legislative regime and therefore careful consideration and advice should be sought in relation to Trust planning.
A Trust can also help protect against future marital breakdowns, which is a common concern of many clients when gifting to their adult children.”
A reason to get up in the morning
When it comes to gifting to individuals during your lifetime, especially to children, a little donor reticence may go a long way.
“It may be hard to believe, but too much generosity by a donor at any early stage, can be problematic,” cautions Nick. “A lot of parents hold back making big gifts to their children because they either want to see their relationships develop into more long-standing ones, or they want them to achieve something in their own right,” he says. “Once the motivation for getting up in the morning, and being a self-starter has gone, parents can sometimes question if they did the right thing in the long run.”
In such instances, there may be value in starting off with small, regular gifts. You can currently give away £3,000 per UK tax year, without being subject to the 7-year rule. Plus you can roll over one tax year’s worth of unused allowance. It’s small change for holders of large wealth but food-for-thought for anyone wanting to build up to bigger gifts further down the line.
“Gifting can be an immensely rewarding experience on many levels, but it’s not as simple as handing some money over. This is especially true if the size of the gift is significant,” concludes George.
Being aware of the implications of gifting – both for you and for your intended recipient – can help avoid pitfalls in the short, medium and long term.
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