Gifting large sums of money like 500k UK to another individual may seem like a simple act of kindness or generosity. However, there are important financial and legal considerations to keep in mind when giving such sizable gifts.
Tax Rules on Gifting in the UK
One of the main things to consider is the tax rules around gifting money in the UK. There are certain thresholds and allowances that come into play when gifting over a certain amount.
In the UK, you can give away up to £3,000 worth of gifts each tax year without them being subject to Inheritance Tax. This is known as your annual exemption.
You can gift as many people as you like up to £3,000 each per tax year under your annual exemption. So for example, if you had five grandchildren you could gift each of them £3,000 – totalling £15,000 – and it would be exempt from Inheritance Tax.
For larger gifts over your £3,000 annual exemption, there is a separate threshold of £325,000. Known as the nil-rate band, this is the threshold up to which lifetime gifts are exempt from Inheritance Tax.
So if you were to gift someone £500,000 in one tax year, the first £3,000 would be covered by your annual exemption. The remaining £497,000 would be exempt up to the nil-rate threshold of £325,000. That would leave £172,000 of the £500k gift that would be subject to Inheritance Tax at 40%.
Inheritance Tax Taper Relief
It’s also worth noting there is taper relief that reduces the Inheritance Tax rate if you survive for 7 years after making a gift. The taper relief percentages are:
Years between gift and death | Inheritance Tax rate |
---|---|
Less than 3 years | 40% |
3 to 4 years | 32% |
4 to 5 years | 24% |
5 to 6 years | 16% |
6 to 7 years | 8% |
7 years or more | 0% |
So if you gifted £500k and passed away between 4-5 years later, the amount of Inheritance Tax charged would be reduced to 24% instead of 40%. After 7 years, the gift would become entirely exempt.
Potentially Exempt Transfers
Gifts over the nil-rate threshold that may be subject to Inheritance Tax are known as Potentially Exempt Transfers (PETs). As seen above, whether Inheritance Tax ends up being charged on them and at what rate depends on if you survive 7 years after making the gift.
One other important point about PETs – if you were to gift someone £500k and some of it ended up being taxable, the person receiving the gift would not have to pay the tax. It would come out of your estate after you pass away.
Gifting and Deprivation of Assets
Another key consideration around gifting large amounts of money is deprivation of assets. This refers to gifting assets or money to deliberately avoid care home fees or tax liabilities.
If gifting is seen to intentionally deprive your estate of assets that would otherwise bear tax, it can be overturned by HMRC. The gift may be treated as if it was still part of your estate for Inheritance Tax purposes if HMRC deems you were deliberately trying to avoid paying tax.
Likewise, gifting money or assets to avoid paying for care home fees can also be overturned. Local authorities have the power to treat gifts made to avoid care home fees as if they are still available capital for means testing.
Using Your Annual Inheritance Tax Allowances
Rather than gifting someone £500k in one lump sum and incurring a significant Inheritance Tax bill, it may be wise to spread large gifts over a number of years.
For example, you could gift £325,000 one year – using up your entire nil-rate band for the year. Then in the following tax year, gift another £3,000 under your annual exemption. Continue gifting £3,000 a year for the next 5+ years and you could legally gift over £500k without incurring Inheritance Tax.
This approach helps avoid exceeding your nil-rate threshold in any given year. Spreading a large gift over time also helps avoid accusations of depriving assets.
Trusts
Another option is to place the money into a trust. This involves transferring money or assets into a trust, naming beneficiaries who can receive gifts from the trust.
Trusts allow you to gift money while still retaining some control over it. The terms of the trust will dictate things like when beneficiaries can access gifts from it.
Putting money into certain types of trusts can also help reduce Inheritance Tax liability on gifted funds. However trusts can be complex, so getting professional advice is recommended.
Lifetime ISAs
If gifting money to a younger relative like a child or grandchild, you could put funds into a Lifetime ISA (LISA) in their name. This can help under 40s save for a first home or retirement.
You are allowed to gift funds to add to someone else’s LISA, subject to the current annual LISA contribution limit of £4,000. While not as sizable as gifting £500k in total, this allows you to gift to a LISA tax-efficiently each year.
Gifting Considerations for the Recipient
There are also some financial implications the gift recipient will need to consider when receiving £500k.
If the money is being gifted as a lump sum, the recipient may push themselves into a higher income tax bracket for the year depending on their existing salary.
Likewise, if the recipient is claiming any means-tested state benefits, receiving a large gift could affect their eligibility or cause their payments to be reduced. HMRC and benefits agencies may request evidence of where large deposits into someone’s bank account have come from.
So making the recipient aware of these potential implications is important too.
Reporting Gifts to HMRC
If you gift someone more than the £325,000 nil rate threshold in a tax year, it must be reported to HMRC. This is done by completing a Inheritance Tax gift exemption form.
Keeping records of any sizeable gifts you make is crucial. Should HMRC decide to investigate, you will need to provide evidence of when the gift was given, who received it, and any other important details.
Seeking Professional Advice
Given the complex tax and legal issues around gifting large sums of money, seeking professional financial and legal advice is highly recommended.
A financial planner can help put together a gifting strategy that legitimately minimises tax liability. A solicitor can provide guidance on the legal implications of gifting and ensure paperwork is drawn up correctly.
Having professional support can help ensure your gifts are structured appropriately and comply with HMRC rules, avoiding issues in the future.
Conclusion
While gifting someone £500,000 may seem like an extravagant act of generosity, there are intricacies around tax, asset deprivation, and inheritance that need thorough consideration.
Spreading large gifts across a number of tax years, using allowances wisely, and seeking professional advice can help mitigate potential issues. With the right approach, it is possible to gift substantial sums legally and reduce Inheritance Tax liability.
The most important things if gifting large amounts are keeping detailed records, being transparent with HMRC, and thinking ahead about the tax and legal implications. This will help ensure your generosity has the desired impact and is received smoothly by the recipient.