Inheritance Tax – A Christmas Gift Guide

Christmas is a time of giving, but have you thought about how this year’s Christmas gifts could benefit your family from an inheritance tax (IHT) perspective?

With freezing thresholds and planned changes to pension rules, more and more families are being pulled under the scope of IHT. At the same time, the increasing cost of living has meant many people are struggling with their finances and younger generations are needing a helping hand to get onto the property ladder.

Gifting assets such as cash, investments and even land can mitigate your exposure to IHT and there is no time like the present for thinking about benefitting your loved ones.

The Seven Year Rule

Substantial gifts, known as “potentially exempt transfers” can reduce the tax-free allowance (or nil rate band) for IHT if the donor then dies within seven years. Gifts totalling more than £325,000, gifted in the seven years prior to death, are potentially taxable at a rate of up to 40%.

However, not all lifetime gifts are taken into account when valuing an estate for IHT. You are entitled to gift up to £3,000 per annum and make any number of smaller gifts (below £250) without it affecting your available nil rate band. In addition to this, you can make gifts in consideration of marriage (£5,000, £2,500 or £1,000 depending on who is getting married). Regular gifts from “surplus income” are also exempt – and this could include annual Christmas gifts.

Your spouse’s Christmas present (and indeed, any gift made to a spouse or civil partner at any time) will also be free from IHT. If you’re feeling charitable this festive season, it is worth noting that any donations to UK registered charities (or political parties), regardless of the value, are tax free and will not be subject to the seven year rule.

Gifting into Trusts

It is not always appropriate to make an outright transfer of your cash or other assets. For example, if the intended recipient is young or potentially vulnerable, then you may wish to consider using a Trust for added protection. You can currently gift up to £325,000 cash (or equivalent value assets) into a Discretionary Trust free of tax every seven years.

The importance of advice when gifting

There are some matters to consider before making any gifts of significant value, such as:

• Specialist tax advice should be taken to check any possible implications which might arise. Capital gains tax (CGT) may apply to certain assets e.g. investments, rental properties etc.
• The “gift with reservation of benefit rules” apply when the donor of a gift continues to enjoy or benefit from it. For example, transferring your home into someone else’s name is not usually an effective way to mitigate IHT.
• Any previous gifts or transfers into Trust made in the last seven years need to be considered.

For more guidance on gifting, please do get in touch with one of our experts.