Our clients are generous people. They frequently make gifts, sometimes to help family members, sometimes to save tax, or both. But it is quite easy not to make an effective gift. The law imposes requirements, which vary according to what is being given. If you don’t follow the rules, the gift won’t be made – the law will not do it for you, even if it is obvious that you intended to make the gift. Here are some common trips and traps, and how to avoid them:
Land and property
Unsurprising this has the tightest rules. A gift of land has to be made by a deed, drafted as such, and signed by the giver, with a witness. You cannot give land verbally, or by letter, or by handing over the deeds, or even by allowing the intended recipient to pay for a new house to be built on it.
Money and cheques
You can make an effective gift by handing over a wad of cash, with words of gift : “this is for you” or “here’s a present for you” or similar. The gift is immediate. If you hand over a cheque, with similar words of gift, strictly the gift is not made until the cheque clears. Until that happens, you could stop the cheque, and the recipient could not sue you for the money. So, if you hand over a cheque intending to make use of your annual £3,000 inheritance tax (IHT) allowance, make sure it is cleared before 5 April, otherwise, strictly, it will be made in the next tax year.
A gift of a chattel, e.g. a picture, furniture, jewellery, animal, or car, needs an act of delivery, with words of gift. So an effective gift of, for example, a picture can be made by handing the picture to the recipient. Just sticking a label on the back of it with the name of the intended recipient will not work. If the item is already in the possession of the recipient, the words of gift will suffice.
A far better alternative is to use a deed to record the gift. No delivery, or words of gift, is then needed. The gift is immediate, and no-one can argue that it was not made.
You may have loaned money to a family member, and later want to convert the loan into a gift, by ‘forgiving’ or ‘waiving’ the debt. It is often thought this can be done verbally, or by letter. Unfortunately this will not work. Again a deed is needed, otherwise HMRC will say the debt has not been released, and the value is still owned by you. You might say what is the difference between a letter signed by you, and a deed signed by you? Understandable, but only the deed works.
Gifts of capital from one partner to another are common. In this case writing is needed, not necessarily a deed. Just instructing your accountant to make the adjustment in the accounts will not be effective, but, once he has done so, the gift will be effective when the partners sign the accounts. Again, if you want the gift to be immediate, use a deed.
Often you may wish to make a gift to take value out of your estate for IHT purposes, either within the annual £3,000 allowances, or after seven years' survival for bigger gifts. You are wasting your time (and maybe a lot of tax) if you have not made an effective gift. At the least you may not have made the gift immediately, so the seven year IHT clock starts later than you wish. With a tax rate of 40%, it’s worth getting it right.
The content of this article is for general information only. Law covered as at April 2016.