Christmas is a time for giving, a time when we all love to see the happiness on the faces of family or friends when they open the gifts we have bought them.
If you’re thinking of giving money as a gift this Christmas, here’s some advice on how to stay on the right side of inheritance tax, allowances and thresholds, from David Hill, Head of Private Client at local law firm Mogers Drewett.
For many people, Christmas is also a time to make a more substantial gift to children, grandchildren or other loved ones.
This can be an attractive option because not only does your loved one have the opportunity to use the gift for an important purchase or event, but gifting is tax free up to certain thresholds and will reduce the value of your estate for Inheritance Tax (IHT) purposes. In other words, you can make a gift without having to pay any tax on it while at the same time your loved ones will have less IHT to pay when you pass on.
So, what are the rules? Firstly, you have a £3,000 annual ‘gift allowance’. This is known as an annual exemption.
You can also ‘carry over’ an unused allowance from one year into the next one. So if you gift nothing one year, you could gift up to £6,000 tax free the next year. However, you can’t roll it up into a third year: it stops at £6,000.
Some gifts are completely free of tax, subject to meeting certain conditions. Gifts of £250 or less are generally tax free (although not if you have already given that person your whole £3,000). Other examples, subject to certain criteria, are wedding/civil partnership gifts and gifts out of “excess income” (income you have left after all of your living expenses have been covered).
There are no immediate inheritance tax consequences of making a gift which has a value above the annual allowance, and if you live for at least seven years following the date of the gift then there are no consequences at all.
However, if you were to die within seven years of making a gift, then the value of it is added to your estate for the purposes of calculating any IHT liability – it is worth bearing in mind that making a gift of any size rarely increases the IHT liability as if you had not made the gift then the asset would remain in your estate anyway! Very large gifts can also benefit from “taper relief” – this is where the IHT liability reduces on a sliding scale from the third anniversary of the gift being made.
It is important to note that a gift of property or shares could mean that other taxes, such as capital gains tax, may become relevant so should be considered as part of your planning process.
Many people like to support charities – and the good news is that gifts to registered charities are generally free of IHT irrespective of the amount given. In addition, you might also be able to claim relief on other types of tax such as Income Tax on charitable gifts.
With so many rules and criteria around gifting, it’s essential to keep good and accurate records of any gifts you make. This should include what you gave, who you gave it to, when you gave it, and how much it was worth at the time the gift was made. This will mean that, should you pass away, it will be easier for the executor of your estate to calculate any tax liability.
As the rules can be complex, it is advisable to consult with an expert in estate planning. At Mogers Drewett, we have an experienced team who can help you make the most of your tax free entitlements – enabling you to spread a little more happiness at Christmas.
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