Jim Sawer answers a question in Moneywise on the workings of the Inheritance Tax annual exemption for cash gifts

24 July 2020

Jim Sawer, Partner in our Private Client team, writes in Moneywise answering the question on how cash gifts can be applied over a financial tax year.

The reader planned to give a £4,000 cash gift to each of his three children in the 19/20 tax year using his and his wife's tax allowance of £12,000 in one year. One payment left the reader's bank account before the new tax year but the other two went out in the new year. The reader and his wife had planned to make a further gift of £6,000 under Inheritance Tax rules in the 20/21 tax year making a total of £18,000. Given the delayed transfers, the reader would like to know if they could gift this year's allowance of £6,000 which will add up to a total of £14,000 for the tax year.

Jim comments:

 There are three issues at play here. The first concerns when the gifts are made. Gifts by bank transfer are not complete until the money arrives in the recipient's account so the two payments were made in this tax year."

The second issue is with how the Inheritance Tax (IHT) Annual exemption is applied. Each person can give away IHT free up to £3,000 each tax year with no need to survive the gift by seven years for it to fall out of account for IHT purposes on death. £8,000 was transferred this year, £3,000 is exempt which means the balance of £5,000 is a potentially exempt transfer which means it will fall out of account for IHT if you survive the gift by seven years."

The last issue concerns using your wife's allowance. Husbands and wives are treated as separate taxpayers, rather than a couple so your wife's annual exemption can only be offset against gifts made by her. In future, it's possible for you to give funds to your wife so she can then make gifts to the children and use her annual exemption."

Jim then goes onto explain if you and your wife plan to make regular gifts to your children, year on year, the "Normal Expenditure out of Income" exemption might come into play.

This article was first featured in July's 2020 issue of Moneywise.

Further information

For more information on the issues raised in this news piece, please contact a member of our Private Client team.


About the author

Jim Sawer is a partner in our Private Client team. He has a broad private client practice and has advised families in the UK and overseas, including those with commercial and landed interests, for over 30 years.  Clients appreciate his ability to identify the true crux of a matter promptly and his results-orientated approach to resolving private client issues in the family context.


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