بِسۡمِ اللهِ الرَّحۡمٰنِ الرَّحِيۡمِ
Giving gifts (hiba) in Islam is a virtuous act that strengthens social bonds and promotes love and affection. Gifting assets as part of estate planning can be an effective strategy to reduce Inheritance Tax (IHT) liability in England. By making use of various allowances and exemptions, individuals can transfer wealth to their beneficiaries while potentially lowering the overall tax burden on their estate. The annual exemption allows for gifts of up to £3,000 per year without IHT implications, while small gifts of up to £250 per person are also exempt. Additionally, gifts made from surplus income can be immediately exempt from IHT without the need to wait seven years.
Definition
The word hiba is often used in Islamic law to denote a gift. Hiba is a narrower concept specifically referring to transfers of property between living persons, in English law a gift is a broader term encompassing various types of property transfers without consideration
Hiba is an immediate transfer of ownership of property or right by one person to another without any consideration.
A gift in English law is defined as a voluntary and gratuitous transfer of property from one person (the donor) to another (the donee) without consideration. A gift can be made during one's lifetime or after death via a Will referred to as a testamentary gift or bequest.
Types of Hiba
In Islamic law, there are several types of hiba with distinct characteristics and each with its own specific rules and implications:
- Hiba (هبة): A simple gift, a voluntary transfer of property without consideration from one person to another.
- Sadaqah (صدقة): A gift made with a religious motive to acquire merit in the eyes of God. Unlike regular hiba, it cannot be revoked once completed by delivery of possession
- Hiba-bil-iwaz (هبة بالعوض): A gift for consideration, resembling a sale. It has two forms:
a) The classical form, consisting of two independent acts: the gift and the return gift.
b) The form practiced in India, introduced as a device for gifting undivided shares in divisible property - Hiba-ba-shart-ul-iwaz (هبة بشرط العوض): A gift made with a stipulation for a return. Delivery of possession is necessary, and the gift is revocable until the consideration (iwaz) is paid.
- Ariyat (عارية): A temporary transfer of usufruct rights, similar to a license. The donor retains ownership, and the gift reverts to them upon the donee's death. It is used mainly for charitable purposes. Upon the death of the donee, the property reverts back to the donor or the donor's legal heirs. Unlike a normal gift, an express acceptance by the donee is not required for ariyat.
- Hiba-bil-musha (هبة المشاع): A gift of an undivided share in property. It's generally prohibited for divisible property under Hanafi school, with some exceptions.
- Hiba al-umra (هبة العمرى): The donor gives the property to the recipient for the recipient's lifetime thereafter the property reverts to the donor or donor's heirs after the recipient's death. The recipient can use and benefit from the property during their lifetime but cannot sell or transfer ownership.
- Hiba al-ruqba (هبة الرقبى): The ownership transfer is contingent on who survives the other (donor or recipient). If the recipient dies first, the property reverts to the donor. If the donor dies first, the recipient gains full ownership of the property.
Note any gifts given while in a state of death sickness (mard-ul-maut) are subject to the rules of a Will hence subject to the one-third rule etc. (cf deathbed gifts in English law below).
Types of Gifts in English law
In English law, there are several types of gifts allowing for various ways of transferring property, each with its own legal and tax implications
1. Inter vivos gifts: These are gifts made between living persons during the donor's lifetime
2. Deathbed gifts (donation mortis causa): The donor must believe their death is imminent due to a specific cause. The gift is conditional on the donor's death and can be revoked if they survive. The donor must deliver or part with dominion over the gift. Such gifts which can include various assets including property override existing valid wills for the specific assets gifted. Text message can be used as evidence (Rahma v Hassan). Deathbed gifts are treated as part of the deceased's net estate for inheritance tax purposes.
3. Testamentary gifts: Also known as bequests, these are gifts made through a Will that take effect after the donor's death.
4. Specific gifts: These are particular items or sums of money specified in a will, such as a house, piece of jewelry, or a fixed amount of cash.
5. Non-specific gifts: These are general gifts that don't refer to any particular item, like "all my personal possessions".
6. Residuary gifts: These involve leaving the residue of an estate (everything left after debts, taxes, and specific gifts are distributed) to named beneficiaries.
7. Charitable gifts: Donations made to registered charities, which are exempt from Inheritance Tax.
8. Small gifts: Gifts worth up to £250 to any person in a tax year, which are exempt from Inheritance Tax.
9. Annual exemption gifts: Gifts up to £3,000 per year that are exempt from Inheritance Tax.
10. Wedding or civil partnership gifts: Tax-free gifts given in anticipation of a marriage or civil partnership, with different allowances depending on the relationship to the couple.
11. Gifts out of income: Regular gifts made from surplus income that don't affect the donor's standard of living.
12. Potentially Exempt Transfers (PETs): Substantial gifts that become exempt from Inheritance Tax if the donor survives for seven years after making the gift.
General Rules
The donor must be an adult with the intention to gift, sound of mind, have ownership of property being gifted and freely consent to the gift. The recipient needs to accept the gift. In Islamic law a gift to an unborn child is valid if born within 6 month of making of the gift. A gift may be made jointly to two or more persons but the shares of each should be clearly specified. A Muslim must act justly and fairly when making any gifts, especially amongst his children and wives.
A gift is revocable before delivery of possession, thereafter it is irrevocable if all the conditions mentioned above are met. A gift between spouses is irrevocable.
A gift made during death-sicknes (mard-ul-maut) takes place-only when the donor dies, it is subject to the one-third rule and cannot be in favour of a legal heir.
Tax Implications for Gifting
Summary of the tax implications for giving gifts in the UK:
- Annual Gift Allowance: £3,000 tax-free per year
- Unused allowance can be carried forward one year - Small Gifts Exemption: Up to £250 per person, per tax year
- Seven-Year Rule: Gifts given 7+ years before death are typically tax-free
- Taper Relief: Reduced tax rates for gifts made 3-7 years before death
- Tax rate decreases from 40% to 0% over this period - Spouse/Civil Partner Gifts: Generally exempt from inheritance tax
- Wedding Gifts: Specific allowances based on the relationship to the couple
- Regular Income Gifts: May be exempt if they don't affect the standard of living
- Inheritance Tax: May apply to gifts if the donor dies within 7 years
- Income assessment takes into account entire tax year
- Current rates (2024/25):
- Basic rate: 18% (for gains up to £50,270 when added to taxable income)
- Higher rate: 24% (for gains above £50,270 when added to taxable income)
- Basic rate taxpayers pay 18% CGT on gains from property and 10% on other assets
- Higher rate taxpayers pay 24% CGT on gains from property and 20% on other assets
Tax Implications of Gifting Crypto
Summary of the tax implications of gifting crypto in the UK:
- Gifting crypto is generally considered a taxable disposal subject to Capital Gains Tax (CGT)
- The disposal proceeds are based on the sterling market value of the crypto at the time of gifting, even if no money is received
- Gifts to spouses or civil partners are exempt from CGT, treated as a 'no-gain no-loss' scenario
- Annual CGT allowance applies (£3,000 from April 2024, down from previous years)
- CGT rates vary based on income, ranging from 10% to 20%
- Receiving crypto as a gift is not taxable, but subsequent disposal is subject to CGT
- Gifts to charity may be exempt from CGT, unless the donation exceeds the acquisition cost
- Capital losses from gifting to connected parties are subject to special rules ('clogged losses')
- Crypto donations do not qualify for gift aid income tax relief
- HMRC requires reporting and payment of any tax due within 30 days of making a disclosure
It's important to keep accurate records of crypto transactions, including gifts, as HMRC views cryptocurrency as an asset subject to taxation.
Conclusions
Gifting assets as part of estate planning can be an effective strategy to reduce Inheritance Tax (IHT) liability but can also be used to distribute assets during one's lifetime according to one's wishes with the constraints of inheritance laws. It is important to understand the law of gifts both in Islamic law and English law if you plan to use this strategy as part of your estate planning. It is equally important to clearly document such transactions for tax purposes and to prevent family disputes after your death. You must clarify the nature of the transfer as a gift to reduce the chances of a legal challenge.
Dr. A. Hussain, 2024