With Christmas fast approaching you may be stuck for ideas of what to get your nearest and dearest. If the idea of spending a day walking around a busy shopping centre fills you with dread, you may want to consider a cash gift instead. But before you go reaching for your cheque book (if you still have one!) please consider inheritance tax implications first.
Inheritance tax is charged at 40% to the extent that your estate exceeds the nil rate band which is currently £325,000 (potentially more if you qualify for the main residence nil rate band). Your estate includes everything you own including items such as your car, furniture, clothing and jewellery. It also includes any gifts you made in the seven years prior to your death.
Making gifts can be a useful tax planning tool to reduce your estate and some gifts are exempt from inheritance tax. We set out below the main exemptions:
Individuals can give up to £3,000 per tax year and can carry forward any unused allowance from the previous year. If you did not make any gifts last year you could therefore give up to £6,000 tax free. You could give the full amount to just one person, or you could split it up between multiple recipients.
Small gits exemption
This exemption covers small one-off gifts of £250 per recipient. You can make as many of these gifts as you like as long as you only make one per person. But note you cannot utilise this in conjunction with the annual exemption. For example, if you gave your child £3,000 to utilise your annual exemption you cannot then give them a further £250 to utilise the small gifts exemption (this also applies if you only gave them part of the £3,000).
Gifts for weddings or civil partnerships
Certain gifts made on marriage or on entering into a civil partnership are exempt from tax. These are:
- Up to £5,000 to a child
- Up to £2,500 to a grandchild
- £1,000 to anyone else
You can combine this with the annual exemption but not the small gifts exemption.
Normal expenditure our of income
This is perhaps the most valuable of the exemptions available. If you have enough income to maintain your usual standard of living you can make gifts from the surplus rather than adding it to say your savings account. You may therefore wish to consider making regular monthly transfers into a savings account for your grandchildren or pay into a life insurance policy. There really is no limit on the amount you can gift as long as it meets the condition that it is from surplus income. HM Revenue and Customs will require evidence of this therefore it is advisable to keep detailed records of your income and expenditure for the seven years before death in order to support a claim for this exemption.
If you would like further help or information, please get in touch to speak to one of our inheritance tax specialists for a free consultation.