Gifts – Fact or Fiction?

In order for a gift to be legally valid, three elements must be present:

1. The intention of the donor to give the gift to the donee;
2. The delivery of the gift to the donee;
3. The acceptance of the gift.

Types of Gifts

1) Gifts between spouses

For the vast majority of matters, gifts between spouses will not be taxable. However, there are a few scenarios where spousal gifts attract transfer taxes. Gifts may be taxable where there is a mismatch in the tax status of the donor and the donee.

In the UK, there is generally an unlimited exemption from inheritance tax (“IHT”) on gifts between spouses and civil partners. However, where assets pass from a UK domiciled (or deemed domiciled) spouse to a non-UK domiciled spouse, the exemption is limited to just £325,000. Gifts in excess of this will be subject to tax in the same way as gifts made to any other individual.

There is an option for the non-UK domiciled recipient spouse to elect to be treated as domiciled for IHT purposes (in order to access the unlimited exemption) but this would also have the effect of bringing their non-UK assets within the scope of IHT, which may not be desirable. This will need to be considered carefully on a case-by case basis.

2) Charitable Gifts

Similarly to spousal gifts, gifts made to charity are generally non-taxable. However, In the UK, in order for a gift to charity to qualify for the charitable exemption from IHT, the recipient entity must not only be operating for ‘charitable purposes’ (as defined in UK legislation), but it must also be registered as a charity in a country of the UK, EU or EEA. Critically, this means that a gift to a charity outside of these zones will not qualify for the exemption, no matter how worthy the charitable cause. Lifetime transfers to non-qualifying charities can trigger immediate IHT charges (as well as charges to UK capital gains tax on assets gifted in specie).

3) The 7 Year Rule

In the UK, outright lifetime gifts to individuals will generally be subject to the ‘potentially exempt transfer’ (“PET”) regime. This means they will pass out of the donor’s estate free of IHT if the donor survives the gift by seven years or more. If the donor survives the gift by more than three years but less than seven, the gifted sum will be subject to IHT on the donor’s death, but at a reduced rate. The PET regime can be extremely advantageous for individuals who can afford to make substantial lifetime gifts, as there are no limits on the amount that can be given away to the next generation tax free under this regime.