A guide to tax implications for Christmas gift giving

Tis the season for giving but selecting the perfect gift can be challenging. For those who wish to give high-value gifts such as money, jewellery, property, or shares, it’s essential to be aware of the legal considerations regarding Inheritance Tax. This month’s blog aims to unwrap some of the critical aspects to remember when considering such gifts.
Inheritance Tax

Inheritance tax (IHT) is the tax levied on the estate of a deceased person. An estate comprises various assets such as money, property, and possessions. If the estate is valued over £325,000 or more, including a home or the sale proceeds of a home, a 40% tax is applied after the person’s death. The amount of tax owed depends on the total value of the estate. Every person in the UK has an annual exemption, which allows them to gift a portion of their estate tax-free and can reduce the amount of inheritance tax owed.

Annual allowance
You can give gifts up to £3,000 per tax year without being taxed for it. This limit includes all the gifts you make, irrespective of how many people you give them to. If you’re gifting your spouse or civil partner, you don’t have to worry about Inheritance Tax. There is no limit on the amount you can give them as long as they live in the UK.

Small gift allowance
You are allowed to give a tax-free gift of up to £250 to as many family members as you wish. Nevertheless, you need to remember that you cannot do this if you’ve already used the annual gift exemption, partially or entirely, on the same person.

Gifts for weddings and civil partnerships
If you would like to give a gift to a family member getting married or entering into a civil partnership, you can give tax-free amounts of £5,000 to a child, £2,500 to a grandchild or great-grandchild, or up to £1,000 to anyone else.

Charitable giving
Charities rely on the public’s generosity to fund their operations and achieve their goals. As a result, they are tax-exempt, meaning that any donations made to them are not subject to taxation. Giving to charities is a wonderful way to support the causes you care about at Christmas.

Exceeding the annual exemption limits
There is no legal limit on how much money you can gift to a family member. However, exceeding the allowances and exemptions will be considered a Potentially Exempt Transfer (PET). If you pass away within seven years of making the gift, the beneficiary may have to pay Inheritance Tax on the amount.

Usually, there won’t be any tax to pay if the estate’s value is below the Inheritance Tax allowance of £325,000. However, the amount of tax payable will depend on the period after the gift is given. If you pass away within three years, a 40% tax rate will apply. Within three to four years, it is 32%. Four to five years, it is 24%. Five to six years, it is 16%. Six to seven years, it is 8%. And if it’s seven years or more, then there won’t be any tax to pay.
 

If you need to speak to a qualified solicitor about inheritance tax and giving gifts to your family, please get in touch with the team today.