Reader Question: What are the tax implications of a gift from my parents
Love your podcast and website, question for you. I've been gifted some money from my parent and I'm considering buying a property to let out.
One was wondering what would be the tax implications, i.e. would I declare the gift on my tax return or just the income from the rent...any advice would be welcome please.
As long as the gift has no strings attached and is direct to you then there are no immediate tax consequences and you don't have to declare it on your tax return. Obviously if you use the money to generate an income then you will need to declare it on your tax return.
But there could potentially be inheritance tax implications if your parent dies within 7 years of making the gift. Any gifts your parent makes to you will be exempt from IHT as long as they live for seven years after making the gift. These sorts of gifts are known as 'Potentially Exempt Transfers' (PETs).
But should they die within seven years and the total value of the gifts they made are less than the Inheritance Tax threshold (currently £325,000), then the value of the gifts is added to their estate and any tax due is paid out of their estate if the total value of gifts and their estate exceeds the IHT threshold. Any tax due is paid by their estate and not by anyone who received any gifts.
However, if they die within seven years of making a gift and the gift is valued at more than the Inheritance Tax threshold, Inheritance Tax will need to be paid on its value, either by the persons receiving the gift or by the representatives of the estate. Assuming that your parent only makes small gifts then this is unlikely to apply.
You may have heard about something called 'taper relief' which reduces any IHT liability if someone makes a PET and they die. However this only applies if they die between 3 and 7 years of making the gift, and the total value of was over the IHT nil rate band threshold. A fuller explanation can be found here - IHT taper relief explained.
Also you must make sure that any gifts are true gifts and that your parent does not benefit from it in any way otherwise it may fall foul of HMRC's gift with reservation rules and still form part of their estate for tax purposes.
But people looking to gift away money should remember that if their estate is worth more than the Inheritance Tax threshold there are some IHT exemptions that allow you to make gifts to others and not have to pay worry about IHT consequences when you die.
For example, you can give away gifts worth up to £3,000 in each tax year and these gifts will be exempt from IHT when you die. This annual exemption is in addition to the other gift exemptions. Here is a link to details of all the gifts that are IHT exempt.