Are cash gifts taxable?

No, not if they are genuine gifts.

But inheritance tax liability may arise if the gifts are substantial and not out of the relative's income to the detriment of their, lifestyle, i.e. if they are a sneaky way of siphoning off funds to reduce a future IHT bill.

If the donor lives for more than seven years after the gift (the likely case), no IHT will be payable. If they die in the next seven years, the recipient is liable for the tax. The tax is calculated at a maximum of 40% of the value of the estate, with the first 255k being exempt. The tax is reduced on a sliding scale from 40% to zero if the gift was made in the seven years before death.

The most tax efficient way to transfer funds to a relative is to gift them while the donor is still alive, but the gift must be final. If there are strings attached (e.g. transfer the deeds of a house into a relative's name while the donor still lives there or loan money on the understanding that, should the need arise, it will be repaid) the IHT will not be avoided and other taxes could be incurred.

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Correct.

Potentially.

This "sliding scale" stuff is widely misunderstood. If a gift of £255k is made and the donor dies 6 years later, leaving a further £255k, most people think the 2nd lot of £255k is exempt, and tax due on the first £255k is tapered down to a fifth, resulting in an IHT bill of £20.4k, but in fact it's the first lot that's exempt, leaving the whole of the second lot taxable at the full 40%, resulting in a bill of £102k.

In message , Ronald Raygun writes

Now where have I seen that before..........................

Yes this is widely misunderstood and widley (even in books) explained incorrectly. The IHT people choose to take the earliest gifts off the nil band first and as it's the tax that's tapered not the gift the taper is applied to the zero tax.

But, where in the various acts of parliament does it say that they can choose to offset the gifts in that order? Did they simply decide to do it that way? In many cases the taper is completely useless. It only have any effect if the gifts total more than the nil band.

Robert

I've no idea where it says so, but I'm sure it must do. The IR don't have the power to make up such potentially contentious rules off their own bat without statutory authority.

Its probably in the Inheritance Tax Act 1984. Unfortunately HMSO online goes back only to 1988.

"Robert Laws" wrote

If the gift were tapered rather than the tax, then this would allow estates greater than the nil-band to be passed without any IHT at all, before the 7 years were up ...

[Eg if a gift of 510K were given (suppose this was "to be" the entire estate) and then death occurred half-way though the 7-year period - and this were tapered by 50% to 255K, then no tax would be payable. Obviously, the tax rules only want to allow zero IHT for larger estates if there has been a clear 7 years since the gift were made!]

You present that as though suggesting that would in some way be absurd.

Except of course halfway through the 7 year period taper would only be 20%, not 50%.