Smart Gifting: Tax-Efficient Ways to Give

In the United States, the annual gift tax exclusion allows individuals to give up to $18,000 (as of 2024) per recipient without incurring federal gift tax. Married couples can combine their exclusions to gift up to $36,000 per recipient. This is a great way to transfer some wealth incrementally over time without impacting your lifetime gift and estate tax exemption. 

However for those with larger estates it’s unlikely to be a major factor in transferring assets to the next generation.

In the UK, the annual gifting allowance allows you to give £3,000 per tax year without it being subject to inheritance tax (IHT). This can be split among multiple recipients or carried forward one year if unused. Additionally, smaller gifts of up to £250 per recipient are exempt from IHT if they’re given to different people.

Using these annual limits effectively ensures that your gifts remain tax-free while reducing the taxable value of your estate.

In addition to these basic tax-free thresholds, there are many other strategic options that may work depending on your individual circumstances. For example, gifts in the UK made above the annual gifting allowance will fall outside of the estate for IHT purposes if the gifter lives for 7 years after the gift is made. 

These are known as Potentially Exempt Transfers (PETs) and have no limit. There are also many specific rules for individual US states around estates tax and gift taxes. 

The details of these rules are outside the scope of this article, but the key point to understand is that it is possible to make some gifts tax-free or potentially tax-free, but it’s an area where professional financial advice is highly recommended.

We’ve covered US estate and gift tax rules in more detail here, and we can also provide personal advice on how to gift tax efficiently in your personal situation.

Charitable donations to qualifying organizations are often deductible from your taxable income, reducing the amount of tax you owe. Contributions can include cash, securities, or other assets, with certain limits based on your adjusted gross income (AGI).

As well as this, charitable donations to a qualified 501(c)3 organisation reduces your gross taxable estate dollar for dollar. The types of organizations which might fall under this category are broad, and can include organisations operating in fields as diverse as education, science, religion, the arts and even certain sports. 

Like in the US, making charitable donations in the UK can be offset against income tax. Alternatively, through Gift Aid, UK taxpayers can boost the value of their charitable donations by 25%, as charities can reclaim the basic rate of tax on your gift. Higher-rate taxpayers can also claim additional relief on their self-assessment tax return.

Charitable donations in a Will reduce your gross estate for IHT purposes, and if at least 10% of your net estate is donated to charity, the overall rate of IHT you pay drops from 40% to 36%.

If you’re considering large or recurring donations, establishing a donor-advised fund (DAF) can provide even greater flexibility and tax benefits. A DAF allows you to contribute funds, receive an immediate tax deduction, and recommend grants to charities over time.

In the US, a revocable trust allows you to retain control of the assets during your lifetime, while an irrevocable trust transfers ownership of the assets out of your estate, potentially reducing estate taxes. Trusts can also be structured to provide for future generations while protecting assets from creditors.

In the UK, discretionary trusts are a popular option for tax-efficient gifting, particularly for passing wealth to children or grandchildren. Trusts can be used to manage the timing of asset distribution, ensure financial security, and provide protection from IHT.

It’s worth noting that there are limits to how much you can gift into a trust to have it classed as a PET. Gifts into trust over this threshold (currently £325,000 per person) can be classed as Chargeable Lifetime Transfers, creating an immediate tax liability and further tax charges every 10 years.

Setting up a trust requires careful planning and expert advice to ensure it aligns with your goals and complies with tax laws in your jurisdiction.

Gifts don’t have to be in the form of cash. It’s often possible to gift assets such as shares or real estate, without first having to sell the asset down. These asset gifts can even be made into trust, allowing you to potentially maintain the asset ownership in the family while also managing taxes.

Keep in mind that there are likely to be other tax implications for these transfers, such as capital gains tax, however it may be possible to save on other costs such as realtor fees.