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The cash gift will be paid from my personal bank account from the proceeds of the sale of the company. I will have already paid appropriate tax on the proceeds received from the sale as per the rules of Entrepreneurs Relief.

Will either of us have any tax liability on this gift given the fact the individual was also an employee of the company?

My understanding is that it would only be subject to inheritance tax if I was to die within 7 years. Is this correct, or would the previous relationship of Company director to employee complicate this and mean captial gains or income tax would be liable?

Both myself and the friend are UK residents and the business is a UK business. Our friendship predates his employment at the company by 5+ years.

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    Can I ask what your final outcome on this situation was? Is there any risk that HMRC would deem that it could be considered a 'bonus' and should have been taxed at the receievers tax rate and not at Entrepreneur's Relief? Also could they may argue it should have NI due on it as well? Thanks!
    – Dan
    Sep 28 '20 at 7:05
  • @Dan Not the OP, but I was on the receiving end of something similar a good 10+ years ago and (touch wood :-)) have not had any problems. At the time, I did find a document (probably from HMRC) that explicitly stated that normally such a gift would not be counted as a bonus (IIRC, an exception was if the payment was in anyway "expected" or contractual: a freely-given "thanks for your help over the years" was fine). I don't think I found an "as explicit" statement about NI, but the tone of the one about tax suggested it wouldn't be due. If I can dig anything out, I might add an answer.
    – TripeHound
    Sep 28 '20 at 9:29
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…Given the fact the individual was also an employee of the company?

As far as I have been able to determine, the fact the beneficiary was a past employee of a company you owned does not make a difference to your tax liability on gifting.

The only tax liability I can see being relevant here is Inheritance Tax (IHT) if you die, which would be paid by the recipient. It sounds like you’re well aware of the rules on that, but for completeness:

  • If the gift is £3,000 or less, it doesn’t count towards your estate for IHT (even if you die within 7 years). You can gift up to £3,000 (in total) each tax year without affecting IHT at all. Since you're talking about the sale of a company I imagine you’re talking about a higher amount than this.

  • Above this level then yes, you get into 7 year rule territory. As you are probably aware, dying within 7 years of a gift means the gift is treated as part of your estate (and the rate of tax paid is on a sliding scale from 8% to 40% depending how many years have passed). Now, it may not be taxable at all if it falls within the £325,000 inheritance tax threshold, but it will use up a portion of your threshold.

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Government website looks quite unhelpful here in that they discuss a lot about you dying within 7 years, but nothing whatsoever about what happens if you live for many, many years.

It seems that even if you die tomorrow, £3,000 are tax free. And if you didn’t make any gifts the year before, then you can carry over the £3,000 from last year, making it £6,000. And next year you can gift another £3,000. And if you are married, I see no reason why your wife couldn’t do the same thing. So if I was in your situation, my wife and I could give someone £12,000 now and another £6,000 at the end of next April. Plus another £1,000 each if the recipient gets married, as a wedding gift.

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Employee is irrelevant. Basically you gift money, and there are laws on taxation of expensive gifts. IIRC you will be liable to pay that.

It is a BAD idea - taxes are likely to ramp up fast as the exceptions are tied to how close related the person is, and friend generally is not a relative at all.

If you wanted him to get part of the company for a better taxation, that should have been done - you know, earlier.

More details here:

https://www.money.co.uk/guides/how-do-i-gift-money-without-being-taxed.htm and https://www.gov.uk/inheritance-tax

40% soudns brutal, but everyone lives in a country of their choice. it is what it is - any other arrangement should have been done earlier (i.e. paying the employee a large bonus during the sale).

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    You answer seems to suggest I can’t gift any non-family member without incurring tax? This is definitely wrong, as stated in the first link you provide. One of the 3 exemptions listed is: “You give the gift more than seven years before you die”. Feb 27 '19 at 9:21
  • Actaually I do NOT suggest that.
    – TomTom
    Feb 27 '19 at 9:26
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    Please explain how the 7 year exception I mentioned is “tied to how close related the person is”. The 3 exception rules mentioned are exclusionary in their own right. You don’t have to meet all 3 to be excluded. Feb 27 '19 at 14:12

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