Alexine Moran of Goughs Solicitors offers some seasonal advice on the subject of tax rules and gifting money this Christmas
Christmas is a time for giving, and it is not uncommon for grandparents or parents to want to give money to their children, to help out in these hard times. Whilst the idea of ‘giving an inheritance’ early has many benefits, it is important that you understand the tax rules when it comes to giving gifts. Let’s look at the best way to gift money this Christmas.
The impact of Inheritance Tax
Whilst inheritance tax is not a very festive subject, it is an important one. Inheritance tax (IHT) is a tax paid on your estate, which includes the value of any property you own, land, buildings, your possessions, investments and money. There is normally no Inheritance Tax to pay if the value of your estate is below £325,000, or you leave everything above that value to your spouse, civil partner, a charity or a community amateur sports club.
There is another relief available called the Residence Nil Rate band, however, for simplicity, we will only use the Nil Rate Band (£325,000) for the purpose of this article. The standard Inheritance tax rate of 40% is charged on the part of your estate above that value.
Each tax year (from 6 April to 5 April the following year), you are allowed to give away some of that estate, as gifts, free of tax. This means that when the time comes for IHT to be calculated, some of your estate will already have been given away, and so the overall inheritance tax bill is smaller.
What is a gift?
It may sound like a strange question at Christmas, but it’s important to understand what a gift is, in the eyes of HMRC. A gift is anything of value, such as cash, personal possessions, investments, land and property. A gift also includes any money you lose when you sell something for less than it’s worth. For example, if you sell a car or house to your child for less than the market value, the difference in value counts as a gift.
If you gift something which has risen in value since you acquired it, there may be Capital Gains Tax (CGT) consequences. You should seek professional advice if you think this may be the case.
Who is the gift for?
The tax implication of gifting depends on who the gift is for. For those in a marriage or civil partnership, there is no limit to what you can gift to your partner, as long as they live permanently in the UK. However, this is not the case for those in so-called common law relationships. Gifting to registered charities also has no tax implication. For all other recipients, there are rules governing how much you can gift tax-free each year and what the implications are above those levels.
Smaller gifts
HMRC defines small gifts as those where the value is £250 or less. You can give as many gifts of up to the value of £250 per person as you want each tax year, so long as you have not used another allowance on the same person. Birthday and Christmas gifts you give from your regular income are also exempt from Inheritance Tax.
So, for example you can give a Christmas present of £1,000 without a tax implication, so long as you can show the money came from your annual income. However, gifting a family heirloom worth £1,000 may have a tax implication.
Regular payments
Rather than giving a one-off Christmas gift, another tax-efficient option is to make a regular payment to help with another person’s living costs, rent, rates, fuel bills, etc. So long as the payments are made from your regular monthly income after meeting your usual living costs, they are tax free and unlimited in value.
A Christmas Wedding?
Wedding gifts have some tax advantages too. Each tax year, you can give a tax-free gift to someone who is getting married or starting a civil partnership. You can give up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, or £1,000 to any other person.
Larger gifts
If you want to make a larger tax-free present, there is an annual exemption of £3,000 worth of gifts each tax year. You can give money or gifts up to the value of £3,000 to one person or split the £3,000 between several people. You can carry any unused annual exemption forward to the next tax year, but only for one tax year.
You are allowed to combine your £3,000 annual exemption with the £5,000 wedding gift allowance, to give your child a tax-free sum of £8,000, for example.
Even larger gifts, and the seven-year rule
So far, we have looked at gifts of up to £3,000 in value. The good news is that you can make a gift of any value, and so long as you live for seven years after giving it, there is no tax to pay. This is known as the ‘Seven-year rule’.
If you die within seven years of giving a gift, there may be an inheritance impact on your estate. The exact rate of inheritance tax due on larger gifts, outside of the allowances, depends on how long you live for after making the gift. The IHT due tapers from 40%, if you die in the first three years, to zero, if you last seven years or longer. The sliding scale of ‘taper relief’ is in the table below.
| Years between gift and death | Rate of IHT tax on the gift |
| 0 to 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 years or more | 0% |
Note that it is your estate that is liable for the tax, not the recipient of the gift. In the case of these larger gifts, inheritance tax is only due if your overall estate, including these gifts, would have exceeded the £325,000 IHT threshold.
Happy Christmas!
We hope this guide has been helpful and you now have a better understanding of tax-efficient gift giving at Christmas, or indeed any other time of the year. If we can be of any assistance, please get in touch, we would love to hear from you.
Happy Christmas and a peaceful new year, from everyone in the Goughs team!