The season of giving is hurtling towards us and what do you give the person that has everything? Well, a gift that could save on inheritance tax is a thought worth contemplating. So, in this blog I’m giving you the lowdown on Christmas gifts and inheritance tax.
What HMRC counts as a gift
In the first instance then let’s get clear on what the tax man puts into the category of gifts. According to your local, friendly collector of taxes the following count as gifts – and it’s a comprehensive list:
- Household and personal goods – for example, furniture, jewellery or antiques.
- A house, land or buildings
- Stocks and shares listed on the London Stock Exchange
- Unlisted shares you held for fewer than two years before your death
Further, HMRC will count as a gift, any money you lose if you sell something for less than its market value. So, if you want to celebrate Christmas by selling your home to your child for less than it’s worth, HMRC will count the difference in value as a gift. And apply tax accordingly.
NB: As an aside, anything you leave in your Will doesn’t count as a gift. Instead it’s counted as part of your estate – defined as all the money, property and possessions you leave behind you when you die. HMRC will use the value of your estate to work out if your family have to pay inheritance tax.
Inheritance tax exemptions
At this point it’s useful to note that two types of gifts are in fact exempt from the inheritance tax scourge whether for Christmas gift giving or gifting in general. They are:
- Gifts between civil partners or spouses. You can give such gifts as often as you wish during your lifetime but with two caveats:
- The recipient is a permanent UK resident
- They are either your legal spouse or civil partner
- Gifts you give to charities or political parties.
So that’s good news. And further, you have allowances that you can use to give away tax free gifts of money or possessions at Christmas or any other time of year. How much is tax free is dependent on which allowance you use. For instance, you can:
Give away your annual exemption
Every single one of us has a personal, annual exemption. At the time of writing (November 2021) it stands at a total of £3,000. So, you can give away a total of £3k worth of gifts, whether sums of money or physical gifts, each year without them being added to the value of your estate. This gifting can be to one person only or split between several people. Either way, you can use your annual exemption to make a welcome Christmas gift.
Now here’s a useful tip: Should you not use all your annual exemption you’re allowed to carry it forward to the next tax year – BUT you can only do that once. You’re not allowed to carry it forward for more than one tax year.
NOTE: If you’re a married couple with two children then you can give their £3k allowance to one of your offspring and your spouse can give their £3k to the other offspring.
Make regular gifts throughout the year rather than only at Christmas
A simple and effective way you can give monetary gifts and circumvent inheritance tax is to give them throughout the year, out of your normal income. This one is great for grandparents.
Assuming that your grandchildren are a blessing to you, then you can put a regular sum of money into their trust fund, ISA or bank account. And, as long as it’s coming from your regular income, with no detrimental effect on your lifestyle then HMRC will disregard such gifts for inheritance tax purposes.
Make smaller intermittent gifts with the small gift allowance
With this allowance you’re allowed to give as many gifts as you wish, up to the value of £250 per person, in a single tax year. But you must not have used another allowance on the same person.
Note that birthday and Christmas gifts, given from your regular income stream, are exempt from inheritance tax.
Other exempt gifts
There are also other exempt gifts that you can make use of. In each tax year you can give away:
- Wedding or civil ceremony gifts of up to £1,000 to any person, £2,500 for a grandchild or great-grandchild and £5,000 for a child.
- Payments to help with another person’s living costs, such as an elderly relative or a child under 18
- Gifts to charities and political parties
If you’re thinking of giving substantial gifts this Christmas and have inheritance tax concerns then I trust you’ve found this helpful. But, should you feel bewildered by it all don’t worry – I’m here to help. I will advise you on all this when you book an appointment to have your Wills drafted and you can email me on firstname.lastname@example.org to book an appointment.
If you’d rather call then email then 07538 946 839 will find me.