Giving and receiving gifts, including large financial sums, sounds great - right up to the point when the tax issues bite. So how to ensure a gift doesn't go sour? This article examines the issues in the UK.

Gifts of money between friends and family are a way of forming bonds of friendship and kinship, but as readers might expect from this news service, they are tax and other issues that can arise. Mark Politz, solicitor and chartered tax adviser and partner in the private client team at Thomson Snell & Passmore, considers some of the issues. The views here are those of the author and necessarily endorsed by the editors; we value contributions and invite readers to respond. 


On the International Day of Friendship (30 July), many people will have celebrated their friendships by exchanging cards and gifts. However, for those who may want to make more substantial gifts to their friends or family members, the following legal and tax implications need to be considered. 

Lifetime gifts
The person making the gift (the donor) should carefully consider what effect it could have on his future standard of living. Could the gift leave the donor short of money if his financial circumstances change?

The donor should also bear in mind that the friendship may not last or that the recipient may die prematurely or have financial or marital difficulties. The gifted assets could then end up in the hands of someone else. To avoid this, the donor could set up a trust to protect the relevant assets. The recipient would benefit initially, but the trust fund would ultimately pass to the donor’s chosen beneficiaries.

It is possible for a gift to be set aside on the grounds of fraud, duress, undue influence, mistake or incapacity, or if it is made to defraud creditors. Any potential problems should be identified before the gift is made.

The donor should consider whether a loan would be more appropriate than a gift. It is important that the arrangements are properly documented, to avoid uncertainty as to whether a payment was a loan or gift. This can often be problem after the death of one of the parties. 

Gifts under a will
The donor may want the recipient to benefit only after the donor’s death, in which case provisions can be included in the donor’s will.  

Professional advice on making a will is strongly recommended. Home-made wills are often inadequate and can result in significant costs in trying to resolve ambiguities and disputes. It is also vital that, once a will has been made, it is reviewed regularly and updated as appropriate.

The donor will need to consider a number of issues. Should he leave the recipient a legacy or a share of the estate?  If the recipient dies before the donor, should the gift pass to named substitute beneficiaries or simply fall into the remainder of the estate? Should any inheritance tax on the gift be borne by the recipient or by the remainder of the estate?  Would the donor prefer to include a trust in the Will, in order to control the ultimate destination of the assets?

If the donor was maintaining the recipient at the time of his death and fails to make reasonable financial provision under the Will, the recipient could make a claim against the estate. This would certainly not be in the spirit of friendship, but it can happen! 

On the other hand, if the donor leaves too much to friends, could this result in a claim against the estate by others, such as the donor’s children?  

Tax implications 
It is crucial to consider the tax implications of any gift. Gifts are often made for tax-planning reasons, but proceeding without professional advice could be very costly. For example, if the IHT “reservation of benefit” rules apply, the donor or his estate could be in a worse position than if no gift had been made.

Lifetime gifts to individuals are exempt from IHT if the donor survives for seven years after the gift.  If the donor dies within the seven-year period, the gift becomes chargeable to IHT, but certain exemptions or reliefs may apply. The recipient would be primarily liable for any IHT that arises on the gift. If the donor wants to provide instead that the IHT should be borne by the donor’s estate, a suitable provision should be included in the donor’s will.

A lifetime gift could also have capital gains tax implications, as a gift is treated in the same way as a sale at market value. So if, for example, the donor gives away assets that have risen in value since purchase, there could be a capital gains tax bill.

Stamp duty land tax and income tax (on “pre-owned assets”) can also apply to gifts in very limited circumstances.  

Formalities
finally, it is very important that the correct formalities for making a gift are observed. There are certain legal requirements for transferring particular assets, such as property and investments. However, even gifts of money and chattels should be documented, to provide evidence of what was gifted and when. This would be useful for future reference, for example, in checking gifts made by the donor within the seven years before his death.

Conclusion
Although the idea of making a gift to friends or family may seem very straightforward, there are a number of legal and tax issues to be borne in mind. Taking professional advice could avoid significant complications and costs arising in the future.