By Andrew Langbridge, Private Client Solicitor, Goughs Solicitors
Christmas naturally brings out people’s desire to give. Many parents and grandparents want to offer financial help, especially with rising costs putting pressure on younger generations.
While the sentiment is simple, the tax rules around gifting can be less so. Understanding such allowances can help you support loved ones without creating unintended inheritance tax consequences later on down the line.
Why gifts matter for inheritance tax
Inheritance Tax (IHT) is charged at 40% on estates over £325,000 unless assets pass to a spouse, civil partner, charity or a qualifying organisation. Anything you give away during your lifetime reduces the value of your estate, which can reduce the eventual IHT bill.
But some gifts are treated differently from others, so it is worth knowing where you stand before writing the Christmas cards.
Each person can gift £3,000 per tax year free of IHT. You can give it to one person or split it between several. If you didn’t use last year’s allowance, it can be carried forward once, allowing a potential £6,000 tax-free gift.
Anything above this is treated as a Potentially Exempt Transfer (PET). These become entirely tax-free if you survive seven years after making them. If you fail to survive this duration, the gift may be subject to inheritance tax, depending on how long you lived after giving it.
Smaller gifts
You can give £250 to any number of individuals each tax year, provided no other allowance has been used for that same person.
Christmas and birthday presents are also exempt when they are made from your regular income, and when you can maintain your usual standard of living after giving them. For example, a £1,000 Christmas gift paid from surplus monthly income is usually tax-free, while gifting a £1,000 heirloom may have significant tax implications.
Regular payments
Ongoing support for someone’s living costs, such as rent or utility bills, can be made tax-free if paid from your normal income after meeting your own needs. There is no financial limit, though clear records are helpful to show a pattern of regular gifting.
Wedding gifts
If someone in the family is marrying around Christmas, the allowances are higher. Tax-free wedding gifts include:
- £5,000 to a child
- £2,500 to a grandchild or great-grandchild
- £1,000 to anyone else
These can be combined with your annual £3,000 allowance.
Larger gifts
You can use the £3,000 annual exemption for larger gifts, carry it forward for one year if unused, and even combine it with allowances such as the £5,000 wedding gift allowance for greater tax-free support. Any amount given beyond these exemptions is still permitted and becomes fully inheritance-tax free if you survive seven years, this is known as the seven year rule.
How can Goughs help
Gifting should feel positive, especially at this time of year. Our Private Client team can guide you through the rules, help you make the most of available allowances and ensure your generosity is structured in a tax-efficient way. If you would like tailored advice, please get in touch.
For more information, contact Andrew at email hidden; JavaScript is requiredand 01249 810878.
