Understanding Gift Tax

What is Gift Tax?

When we talk of knowing more about gift tax, it is logical to start at the beginning, by answering the basic question – what is gift tax? In simple layman’s terms, gift tax is a form of tax that you pay on gifts when they exceed certain threshold levels.

However, as you can infer from the above definition, not all gifts are taxable. They have to meet the essential criterion of crossing the threshold levels, which are set by the regulatory tax authorities.

What Transactions Come Under the Purview of Gift Tax?

There are certain specific transactions that come immediately under the purview of gift tax. For starters, making a cash gift to someone can be taxable, depending on the amount that is being given.

Besides cash transactions, other transactions that are liable to be eligible for gift tax include the following:

• Transfer of immovable assets, such as a house or a plot of land, to another person.
• Expensive gifts, such as jewellery or automobiles.
• Use of a house for life.

All these are ready candidates for gift tax as they all involve transactions that are cash-heavy. An automobile, jewellery, or a house costs a lot of money, hence you are liable to be taxed for engaging in such a transaction.

Are all Gifts Tax-Free?

Basically, as seen from the above paragraphs, not all gifts are free. Some of them invite taxation. However, how much the tax is, or whether the gift comes under the taxable bracket at all, depends largely on the tax ceiling or threshold set by the regulatory authority for tax.

The tax thresholds depend on the type of relationship that the person giving the gift and the person receiving it have. In the UK, there are basically three primary thresholds for gift tax.

Three Basic Gift Tax Thresholds in the UK

The first such threshold is Group A. It applies primarily to a child, natural, step, or foster, depending on the circumstances existing at that point in time. It also applies to a grandson of the donor, provided the grandchild has crossed 18 years, and has no living parents.

The second threshold is Group B. This is applicable to brothers, sisters, nephews, and nieces.

The third threshold is group C. This is applicable to any person who is receiving a gift, and does not come under either of the two classes mentioned above – Class A or Class B.

More about Gift Tax Thresholds

It is not necessary that a person gifting to another should reach the threshold on the strength of just a single gift. It is also possible that the person has actually been gifting to the other people over a period of years. However, you must also note that for tax purposes, only those prior gifts that adhere to the same group threshold are applicable for this tax.

Calculating Gift Tax

Usually for the purpose of calculating gift tax, there is a cut-off date. Any gifts accepted by a donee on or after that date, which come under the same group threshold, are totaled to calculate the exact amount to be paid as gift tax.

Usually, the tax amount if the amount comes within the allotted threshold amount is nil. However, there is a certain percentage deducted if this crosses the threshold amount.