Friday 27 April 2012

Are gifts taxable?

Question
Can someone give you a large sum of money tax free?

It would probably be from the sale of a property or a monthly amount if they rent a property out.

This person is not related and owns two properties but wants to realise the money now using the majority of the profit (if sold) or (a regular monthly income if rented out) for their own use (buying a new car, improving the main residence etc). They have been friends for life and would like to gift as much as £100,000 with no strings attached. They are financially very secure and would like to share their "good luck" as they have no dependants and "can't take it with them when they die".

Would this be the same as, for example, a millionare lottery winner giving whoever they like large sums of money (you hear on the news that winner "X" is going to give large amounts to friends and family). As it is a "gift" is there definately no tax incurred?

Would the receiving Bank or building society (if it is in cheque / cash form) highlight this above average amount being credited and notify HMRC even though we could prove it is not the proceeds from nefarious or illegal activities..ie like money laundering, drugs etcAnswer
The simple answer is yes, provided the money is a genuine gift and not payment for work or some other service or trade, you can receive money tax-free. HMRC takes the view the gift is likely made out of taxed income or gains, so it would be unfair to tax you on receiving it. Of course, you'll be liable to tax as usual on any money you make from the gift, e.g. interest if you put it in a savings account, but you won't be taxed on the gift itself.

Neither HMRC nor the receiving bank should give you any grief (as there's no reason to, it's perfectly legal) but it might be wise if the friend gives you a letter confirming the gift to avoid any potential headaches in future

The bigger issue is usually how the inheritance tax position of the person making the gift is affected.

In normal circumstances if they live for at least seven years after making the gift it will fall outside of their estate for inheritance tax purposes. If they pass away before then it'll be included fully within their estate unless gifts within the last seven total more than the nil rate band (currently £325,000), in which case the proportion included within the estate reduces over the seven years.

However, if the gifts are from normal expenditure (which basically means taxable income) then the gift would usually be deemed to fall outside of their estate straight away. Property rental income that's surplus to requirements would be a good example of this.

As your friend doesn't have any dependents they might not be concerned about inheritance tax. But if they are then giving money away can help (if they live for at least 7 years), as would leaving the proceeds of their estate to charity when they pass away.

Read this Q and A at http://www.candidmoney.com/questions/question579.aspx

No comments:

Post a Comment