How Does HMRC Know About Gifts?
If you are keen to learn about how the HMRC gains knowledge of gifts for tax deduction purposes, you will find guidance in the following article. In addition to discussing how the HMRC finds out about gifts, we will also talk about the relationship between gifts, income tax and inheritance tax.
How Does HMRC Know About Gifts?
HMRC does not usually know about gifts until the person who has gifted something (this can be in cash, a property or a valuable item) declares the monetary value of the gift to the HMRC.
In the case of gifts being passed down in the form of an inheritance, the HMRC usually finds out about these when the Executor of a well declares gifts left behind by the deceased as well as their monetary value while applying for probate to handle the deceased’s estate.
That said, you are not required to declare your gifts to friends and family if the value of your gift(s) remains below the annual gifting allowance of £3,000. If there are gifts valued higher than this amount, you will need to inform the HMRC when you gift the item (this applies to cash gifts above £3,000 as well) so that they are able to calculate the amount of tax on them.
When it comes to taxable gift items, the HMRC considers the following valuables under this classification for tax deduction purposes:
In addition to this, if you experience a loss in value while transferring something to a friend or family member such as selling your home to someone you know for less than its actual value, the benefit gained by them through this transaction will be treated as a gift and considered as taxable income.
Therefore, if you have received or given gifts that fall into any of the aforementioned categories and are valued at more than £3,000, you should inform the HMRC about them. Even though the authorities may not find out about such gifts on their own, if they suspect you of deliberately withholding information related to taxable gifts, they can conduct an official investigation to check your records and make sure that you pay the required amount of tax on gifts.
At the same time, it is not advisable to hide taxable gifts from the HMRC for tax avoidance or tax evasion. If the authorities suspect you of intentional tax avoidance or someone tips them off about your actions, you can face a severe and hefty penalty and even be sentenced to a jail term of up to 7 years.
What Are Tax-Empted Gifts?
Tax-exempted gifts are those items that are not going to be taxed by the HMRC even if they are valuable. These include the following:
- Small gifts that are valued up to £250
- Wedding or civil ceremony gifts
- Gifts to one’s spouse
- Gifts that are given to charities and political parties
- Gifts intending to cover living costs
How Does Inheritance Tax Apply To Gifts?
Inheritance Tax applies to the estate of someone who has passed away and left behind property, money and possessions that are to be gifted to their immediate family members. In most cases, there is an Executor (immediate family member) who reads out the deceased’s will and proceeds to “manage” in an appropriate manner so that:
- if there is a will made by the deceased, the instructions are followed or;
- in the case that there is no will of the deceased, the estate is appropriately handed over to the legal heirs
The standard rate of Inheritance Tax is 40 per cent on an estate valued at or more than £325,000.
Even though there is no Inheritance Tax levied on an estate that is valued below £325,000; however, you may still be required to report the property to HMRC. Similarly, if valuables above the £325,000 threshold are left behind in the name of one’s partner or spouse, a charity or a community club, there will be no inheritance tax levied.
If the same property is left behind for children, the threshold will increase to £500,000.
The above discussion highlights that the HMRC does not learn about taxable gifts on its own and rather requires you to declare gifts when a tax deduction applies to them. Despite this, it is not advisable to try to avoid taxes by hiding gifts as the penalty of intentional tax avoidance can be very severe.