Don’t forget the Tax rules this Christmas
At this time of year many families come together to celebrate Christmas, and all too often decide to make a financial gift (usually cash or a cheque) to a loved one in lieu of a present.
Depending on the amount gifted you will need to take account of the following Inheritance Tax (IHT) exemptions which should offer immediate relief from any potential future tax liability on the recipient of the gift.
1.Gifts to your spouse or civil partner
These types of gifts are generally ignored for Inheritance Tax irrespective of the amount involved (provided the recipient is UK resident/domiciled); so, if you want to gift £50,000 to your “beloved” to buy the latest Mini Electric Convertible you’ll have no tax issues.
2.Annual exemption of £3,000 per tax year
This exemption is the one known by most taxpayers and is usually sufficient to cover the larger gifts to your immediate family members. The amount applies to the donor so for example one parent could gift £1,000 to each of their three children and the other parent could do the same.
If you are feeling particularly generous and didn’t use this exemption in the last tax year (2022/23) you can also use this amount to make a total gift of £6,000. With your spouse doing the same a married couple can gift £12,000 in total and once again these gifts offer immediate IHT savings.
3.Small gifts amount of £250
This allowance is designed not just for smaller Christmas gifts but also Birthday and one-off events (excluding marriages – see below) but in practice you see many clients use it each year when making Christmas gifts to grandchildren, god-children and the like; you can make as many of these gifts as you like but up to a maximum of £250 per recipient.
For example, grandparents with 8 grandchildren between them can gift a further £4,000 in addition to the £12,000 gifted to their parents.
A married couple combining the use of £3,000 annual exemptions and this small gift amount can easily cover gifts of £5,000 per tax year – with immediate IHT relief.
4.Gifts on marriage/or civil partnership
Although the number of marriages continues to decline, HMRC do offer higher tax-exempt amounts when making a gift to your children or grandchildren/great grandchildren on such an occasion.
For a parent making a gift to their child the amount is £5,000 per parent whilst a grandparent can gift £2,500; For anyone else the amount is just £1,000.
So, for joint parents, a total gift of £10,000 can be made without any further reporting to HMRC; given the ever-increasing costs of wedding ceremonies this level of exemption remains historically on the low side. The level of this relief remains unchanged since the 1980’s – so clearly this exemption not really kept pace with inflation etc.
5.Regular gifts out of excess income
Many clients have good index linked pensions and combined with higher returns on cash deposits “may” have income in excess of their ordinary day to day requirements.
In such circumstances HMRC does permit such “excess” income to be gifted to family members provided it does not impact their normal lifestyle. Such gifts will be immediately exempt from IHT irrespective of the excess amount involved.
In very simplistic terms if Mr and Mrs Generous have post tax income of say £50,000 but only need £30,000 to meet their everyday living expenses (utilities, insurance, food, holidays etc.) they will have an excess of £20,000 gifting to their children will be IHT effective provided they repeat it in future years where further “excess income” arises – i.e. there is a need to establish a pattern of these types of gift.
In the following year if Mr and Mrs Generous have the same level of post-tax income but spent an additional £10,000 on a holiday their excess income would be reduced to £10,000 which could then be gifted under this specific allowance, and so on for future years.
To summarise, when it comes to Christmas gifting to your family make sure you utilise one or more of these exemptions permitted by HMRC. Whilst the amounts are not overly-generous, by using them each tax year you can make inroads to mitigating the overall IHT exposure on your estate and hopefully bring a nice smile to your children and grandchildren’s faces – that bit is priceless.
Have a Merry Christmas and best wishes for 2024.
If you need any further support take a look at our IHT thresholds blog or contact our Tax Director, Nigel.Shaw@langricks.com
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