Tax on gifts

milleniumaire

I'm aware of the gift allowances and the 7 year IHT rule, so assuming a gift is larger than any gift allowance and I live for more than 7 years after giving the gift, I'm a little confused about how the tax on income resulting from the gift is determined.

For example, assume I want to give £20k to my 23 year old son.  I could do this in one of 3 ways:

1. Put £20k in a bank account in his name.  This would accrue interest and my understanding is that I would have to pay tax on that interest.  I'm a 40% tax payer.  Would tax be payable forever or is there a time limit?

2. Transfer £20k of shares to his share account.  These shares attract dividends, so again, I believe I would have to pay tax on the dividend income, but how long for?  I understand I may also have a potential Capital Gains Tax bill to pay as the act of giving is treated as a sale for CGT purposes.  Ignore Gift hold-over relief as the shares are in listed company's.

3. I withdraw £20k cash and give it to him, not knowing what he plans to do with it.  In this case, I have no idea if the cash will generate any income, so how can I be held accountable for tax on any income associated with the gift?  Assume he puts the money into a bank account, is that now the same as 1 above.  If he uses it to purchase shares and they pay dividends, am I then liable for the tax on those dividends?

I find this whole area of tax from gifts very confusing.

As far as I understand, the above is also true if I were to gift a large amount to another family member i.e. not one of my children.  Is this the case? i.e. there isn't special treatment for my son in the tax system, it is the same for whoever receives the gift from me?

Keep_pedalling

You can gift as much as you like, no need for such complexities. Any income that your son gets from the gift is his and any tax due on that income is his not yours,

The 7 year rule applies to inheritance tax. Any non exempt gift you make stays in your estate for IHT purposes only. Gifting never increases you tax liability.

milleniumaire

Thanks, I've just researched again and realised I was reading about "Parental Settlement"  rules, which only apply when parents gift to children under 18, in which case the parents may be liable to tax on income that the gift generates.

Thank goodness I don't have to worry about this, I just need to live for 7 years!

Grumpy_chap

milleniumaire said:

For example, assume I want to give £20k to my 23 year old son.  I could do this in one of 3 ways:

1. Put £20k in a bank account in his name.  This would accrue interest and my understanding is that I would have to pay tax on that interest.  I'm a 40% tax payer.  Would tax be payable forever or is there a time limit?

2. Transfer £20k of shares to his share account.  These shares attract dividends, so again, I believe I would have to pay tax on the dividend income, but how long for?  I understand I may also have a potential Capital Gains Tax bill to pay as the act of giving is treated as a sale for CGT purposes.  Ignore Gift hold-over relief as the shares are in listed company's.

3. I withdraw £20k cash and give it to him, not knowing what he plans to do with it.  In this case, I have no idea if the cash will generate any income, so how can I be held accountable for tax on any income associated with the gift?  Assume he puts the money into a bank account, is that now the same as 1 above.  If he uses it to purchase shares and they pay dividends, am I then liable for the tax on those dividends?

1. £20k in his name - any further interest will be in his name and subject to income tax at his appropriate marginal rate (after allowances / zero-tax provisions are exhausted).
2. Shares in his name - dividends will be paid in his name and subject to income tax accordingly.  CGT for the OP on the value (and gain) now.  CGT for the son when the shares are sold based on value (and gain) in the future.
3. £20k cash - he might blow it all on a one-night binge with his mates, or he might start a business and become the next Richard Branson, or he might do something in between.  If he does something that generates a future income, that income is liable to income tax to be paid by the son.

However the OP gifts the £20k to the son, any future income tax liability is for the son to settle.

[Deleted User]

milleniumaire said:

Thanks, I've just researched again and realised I was reading about "Parental Settlement"  rules, which only apply when parents gift to children under 18, in which case the parents may be liable to tax on income that the gift generates.

Thank goodness I don't have to worry about this, I just need to live for 7 years!

The main point that has been made is, whether you gift £20000 or not, the tax liability cannot increase by making it.