The holiday season is a time of giving, and what better way to express your love and generosity than by gifting financial presents to your loved one this Christmas. Gifting to children or grandchildren this Christmas could be a tax-efficient way to help them pay university tuition, pay off student loans or even get them on the property ladder. Along with the pleasure of seeing your loved ones enjoy your gifts, you can also reduce the Inheritance tax liability (IHT) of your estate.
IHT is a tax levied on the valuation of an individual’s estate following their death, with the standard rate of tax being 40% on anything over £325,000. However, through careful planning, calculating how much is affordable to gift and obtaining specialist advice, there are plenty of ways you can minimise this tax burden whilst still spreading the Christmas cheer. The best ways to give financially this Christmas include gifting from surplus income, bare trusts and utilising the annual and small gifts exemptions.
A gift, simply put, is anything that is part of your estate (i.e., property, investments, money, or personal possessions). One thing to remember, is that you cannot add conditions to your gifts. For example, if you were to gift a property, you cannot continue to live in that property rent-free or the gift with reservation of benefit rules will apply.
Begin giving early! As soon as you give a gift (that does not benefit from any of the exemptions), an IHT clock starts ticking. Seven years must pass before your gift becomes 100% IHT free and falls outside of your estate. If unfortunately, you were to die before the 7 years expire, your beneficiary may be required to pay IHT. However, they could be eligible for a sliding scale of ‘taper relief’ which progressively reduces the rate of IHT on gifts between 3 and 7 years.
Ways to Gift this Christmas
1. One of the simplest ways to reduce IHT is to take advantage of the annual exemption. Everyone can make gifts up to £3,000 per year without any IHT being payable. If it is unused one year, this allowance can even be brought forward by a year, allowing you to gift up to £6,000 in a single year. It can be a good idea to make the most of this opportunity and give gifts up to the value of the annual exemption regularly.
2. In addition to this annual gift allowance, the UK has a small gift exemption, which means you can also give as many gifts as you like up to £250 per person. These gifts are also completely IHT free, meaning you have no 7-year clock ticking. Consequently, this method of gifting is a great way to spread the holiday cheer to friends or extended family without the worry of IHT.
However, it is important to note that you cannot combine this small gift exemption with your annual exemption when gifting to the same person (i.e., you cannot give someone a gift of £250 if you have already given them your annual gift allowance of £3,000, or IHT may apply).
3. If you have a Christmas wedding coming up, it is possible to gift a tax-free gift to the couple getting married, but the amount you are able to give depends on your relationship to the couple. You can gift up to £5,000 to a child, £2,500 for grandchildren or great-grandchild, or £1,000 to relatives or friends.
4. Donations to UK charities, political parties and community amateur sports clubs can go a long way around Christmas time, and by leaving 10% or more of your estate in your Will to one of these groups ensures that the IHT rate chargeable on the value of your estate at death drops to 36%.
5. Setting up trusts can also be a tax-efficient way to gift money during Christmas. There are various types of trusts available, and they offer different tax advantages. Bare trusts, however, have no investment limits and money can be contributed by grandparents and used by grandchildren. Money within the bare trust is taxed as if it is held by a child, utilising their annual allowances, and regular contributions by grandparents from surplus income are exempt from IHT.
Considerations when Gifting
When gifting, it is very important that you record and track the details of any gifts you have made. This will include who each gift was given to, what type of gift it was, the date it was given and the value of the gift. By keeping this information, you ensure that eligible gifts will fall outside your estate, thus making it easier to establish if there is any IHT due.
IHT tax planning is a complex area, and navigating the complexities of the law can be challenging. It is important to carefully manage your estate and consider the gifts you can afford to make. If you would like any further information regarding IHT planning please do not hesitate to contact a member of our team today.
Disclaimer: This article is for general information only and is not intended to constitute individual advice. It is recommended that you seek independent tax advice.