Christmas is a time for giving and if you are struggling for ideas about what to give your nearest and dearest, and you are keen to reduce the amount of inheritance tax paid to HM Treasury when you die, you might want to talk to your solicitor about how to give away money and assets tax-efficiently.
Deborah Adams, Director of Private Client Services for Parnalls Solicitors, outlines how different gifts are viewed for inheritance tax purposes and the importance of planning carefully with such gifts.
Tax treatment of gifts when administering your estate
When it comes to calculating the value of your estate for inheritance tax, your executors will need to look back at your financial records for the last seven years. They will then add the value of any gifts made within those seven years to the value of any money and property that you left when you died. Any debts will then be deducted from the total before inheritance is calculated on the net value of your estate.
The purpose of taking into account such gifts in the years before your death is to prevent people giving away suspiciously large amounts of money or assets in their later years specifically to avoid inheritance tax.
Although certain allowances are available, there are complex rules about how different allowances interact with each other, so it is important to speak with a solicitor.
There is no need to worry about stocking fillers and Secret Santa gifts – inheritance tax is not payable on small gifts made out of your normal income and which are known as ‘exempted gifts’.
You can also give Christmas gifts of up to £250 in cash to as many people as you like, not just close relations.
You do not need to worry about gifts for your spouse or civil partner – you can be as romantically extravagant as you like during your lifetime, as long as they live in the UK permanently. Things get more complicated if you are not married or are not permanently resident in the UK.
Everyone has an annual exemption from inheritance tax (sometimes called the ‘gift allowance’) which allows you to give away assets or cash up to a total of £3,000 per year without incurring inheritance tax. For instance, a couple can give a total of up to £6,000 per year to their children or grandchildren.
The annual exemption period runs from 6 April to 5 April so, if you have not reached this limit yet and you have cash to spare, then Christmas is a good time to take advantage of this tax exemption.
If you have not made any gifts in the last tax year or you did not use up the full allowance, you can carry forward any leftover allowance to the following year, up to a maximum of £6,000 (but for one year only).
Christmas gifts can be anything of value – so you could give envelopes of cash to your siblings, bestow family jewellery on your daughter or pay for your grandson to go travelling. As long as the gifts collectively are not worth more than £3,000 (£6,000 for a couple), no inheritance tax will become due.
If you use up all your £3,000 annual exemption on Christmas gifts and have made use of the small gift exemption, but you still want to give away more money, there are other types of gifts you can give without creating an inheritance tax liability.
Regular giving from income
If you have more income than you need, Christmas might be a good opportunity to let someone know that you wish to make a regular tax-free gift. You could set up a standing order to pay money regularly into a child’s savings account, help a grandchild with living costs while at university or invest in shares for an older child.
To make use of this allowance, the giving must come out of your income, and you must be able to maintain your usual standard of living after the gift has been paid. It also needs to form part of a regular pattern of spending – a one-off payment would probably not qualify.
Supporting a charity
Charity is often close to the heart over the festive season and you can give away any amount to a charitable cause without incurring an inheritance tax liability on it. Instead, the value of your estate will be reduced by the amount of money you leave to charity before any inheritance tax is calculated.
Also, if you leave more than 10 per cent of your estate to charity, the rate of any inheritance tax payable could be reduced to 36 per cent (down from 40 per cent) – leaving more money available for your loved ones.
How a solicitor can help
The rules surrounding inheritance tax gift exemptions are quite complicated and it is a good idea to seek advice about any aspect of inheritance tax planning. A specialist private client lawyer can advise you on how to make gifts most effectively and to ensure your relatives do not face an unexpected tax bill after you have died.
It is also important, if you do decide to give money or assets to family or friends during your life time, to keep accurate records of what you gave; who you gave it to; when you gave it; and how much it is worth. This will make it simpler for the executor of your estate to calculate what tax is payable on your estate when you have died.
For further information, please contact Deborah Adams, Director of Private Client Services on 01566 772375 or email firstname.lastname@example.org
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.