What To Give This Year?

With Christmas now only a matter of weeks away, the annual dilemma of what to buy our nearest and dearest has arrived again. With gifts being increasingly hard to buy for those who seemingly already have everything, financial gifts are probably more popular now than ever before.

Gifts of cash will no doubt be warmly welcomed by the recipient, but there are also potential advantages for the giver too, in the way of inheritance tax (IHT) relief for the more substantial gifts.

All taxpayers are eligible to take advantage of an annual IHT gift allowance of £3,000 per tax year which will immediately fall out of their estate for IHT and they do not have to outlive the gift by seven years. Records should be kept of all gifts given, including those given for other occasions including birthdays, weddings, and other celebratory events.

If you wish to make gifts over and above the £3,000 annual allowance then you would need to survive the gifts by seven years for the value to fall outside of your estate and not affect your individual tax free allowance available to your estate on your death (currently £325,000).

For smaller cash gifts, these are covered by the Small Gifts Exemption, which allows as many gifts of under £250 to be made as you wish – they will all be exempt.

Furthermore, it is useful to know that an unlimited amount of income can be gifted – provided it is out of ‘excess income’ – as a means of preventing your estate from increasing in value. This is a useful allowance for IHT planning to give money to children, grandchildren or other loved ones. However, to take advantage of this, it is essential that comprehensive records are kept to show that after paying your living expenses you are able to make the gift without compromising your lifestyle and it is income not capital which is given. The allowance is in addition to the annual £3,000 allowance.

Additionally, with the rise in popularity of winter weddings, as well as making Christmas gifts, it is possible you may also be looking to give cash as a wedding present. In this situation, the level of tax relief will vary depending on the relationship between the person who gives the gift and the recipient. Each parent, including step parents, can give up to £5,000 tax free. Grandparents can each give up to £2,500, and other relatives and friends can each give up to £1,000.

As we approach the season of giving and goodwill, it is good to know that you are able to gift widely with tax exemptions. However, if any clarity is needed with regard to your tax liabilities, expert advice should always be taken.