As Christmas approaches, gifting cash to loved ones can serve a dual purpose: spreading holiday cheer while also reducing potential inheritance tax liabilities. Recent figures from HM Revenue and Customs (HMRC) reveal that inheritance tax receipts have reached a staggering £5.8 billion in just the first eight months of the current tax year, an increase of £84 million compared to the previous year. This trend underscores the importance of strategic financial planning as individuals seek to minimize their estate’s tax exposure.
Gifting money during the festive season not only benefits recipients but also lowers the taxable value of your estate. By effectively managing the value of your estate, individuals can reduce the impact of the standard 40% inheritance tax rate on amounts exceeding the £325,000 nil-rate band. It is essential to maintain thorough records of any gifts made, as this will assist the executor of your will in reporting to HMRC upon your passing.
Maximize Your Gifting Allowances
According to Sarah Coles, head of personal finance at Hargreaves Lansdown, there are several strategies to effectively utilize inheritance tax gifting rules this holiday season. The first step is to make the most of the annual gift allowance, which allows individuals to give away up to £3,000 each tax year without impacting their estate. This allowance can be divided among multiple recipients, such as gifting £1,500 to one family member and £1,500 to another. Additionally, if the full allowance was not utilized in the previous tax year, it may be carried forward, enabling a total gift of £6,000.
Another option is the small gift allowance, which permits individuals to give as many gifts of up to £250 per person each tax year, provided that the recipient has not received a larger gift through the annual exemption.
Wedding Gifts and Surplus Income
Gifting for weddings or civil partnerships allows for larger financial contributions under inheritance tax rules. Coles notes that individuals can gift £5,000 to children, £2,500 to grandchildren or great-grandchildren, and £1,000 to other individuals. Importantly, these wedding gift allowances can be combined with other exemptions, although they cannot be paired with the small gift allowance.
Another avenue for gifting is through “surplus income,” utilizing the “normal expenditure out of income” exemption. This allows for potentially greater gifts beyond the £3,000 annual limit, provided certain conditions are met. Gifts must be part of a consistent pattern of normal expenditure, the giver must maintain their standard of living post-gift, and the funds must come from regular income sources, such as pensions or rental income. Coles suggests that contributions to a Junior ISA for children can also be considered under this exemption.
Understanding Potentially Exempt Transfers
For those looking to make larger cash gifts, the “seven-year rule” facilitates what are known as Potentially Exempt Transfers (PETs). Gifts made within this seven-year timeframe are exempt from inheritance tax, provided the giver does not pass away within that period. Coles recommends making these gifts during family gatherings, like Christmas, when discussions about financial matters can naturally occur.
If a donor dies within seven years of making a gift, inheritance tax applies on a sliding scale known as “taper relief.” For example, gifts made within three years of death incur a tax rate of 40%, while those made between three and seven years prior are taxed at rates that decrease gradually from 32% to 0%.
Consider consulting a tax expert or financial adviser if you are contemplating using these exemptions, as the rules can be intricate and require careful navigation. By gifting strategically this Christmas, individuals can benefit both their loved ones and themselves in terms of tax efficiency, creating a win-win scenario during the holiday season.
