Tis the season of goodwill…
Some of you will have now finished your Christmas shopping and will be looking forward to the Christmas break. If you are making Christmas gifts to family and friends, the inheritance tax (IHT) consequences may not be at the forefront of your mind, but it might be helpful to be aware of the possible IHT effect of such gifts.
Inheritance tax and Christmas gifts
Although there’s no specific exemption for Christmas gifts, the vast majority of presents will have no IHT consequences. You might be aware that gifts you make in the 7 years before you die can be bought back into account for IHT purposes. However, the following exemptions from IHT may apply to the gifts you choose to make:
- Small gifts: outright gifts of up to £250 per recipient (this is a cumulative limit for all gifts to the same person in any one tax year).
- Gifts to UK charities: these are exempt regardless of the amount.
- Gifts to spouses or civil partners: these are exempt regardless of the amount (if they are UK domiciled).
- Gifts within the annual allowance: An individual can give away £3,000 per tax year without any IHT consequences. Any unused amount can be carried forward for one year only to give a maximum of £6,000 (so potentially up to £12,000 available for a couple).
- Gifts from surplus income: If you have surplus income, then gifts could potentially be covered by the exemption for ‘normal expenditure out of income’. You must be able to maintain your usual standard of living and make regular payments. It is important to keep detailed records and ensure that all requirements are met as your executors would need to claim the exemption after your death if necessary.
- Marriage exemption: If you have already given a gift this tax year in respect of a marriage, this may not have used up your allowances above as there is an additional allowance of £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to any other person. This allowance can be combined with the other allowances (except for small gifts).
For example, if Julie gifts £5,000 to her spouse, £1,000 to charity, £3,000 to her son and £250 to each of her 4 nieces, these will all be covered by the above exemptions and there will be no IHT consequences for these gifts.
For larger cash gifts not covered by the exemptions mentioned above, the gift will be ‘potentially exempt’ from IHT. This means that if you survive 7 years it will be outside of your estate for IHT purposes in any event, regardless of the amount. There would be no tax to pay on the gift at the time it is made.
If you were to die within 7 years of making the gift, then there potentially could be increased IHT to pay as a result of the lifetime gift, but this will depend on the unused amount of the various nil-rate bands available at the time of your death.
Gifts under a power of attorney
You may be an attorney for a relative or friend who no longer has mental capacity and who cannot decide to make their own Christmas gifts. You should check the document appointing you for any restrictions as to gifts which may be made.
If you are an attorney under an Enduring Power of Attorney (EPA) the legislation states that you as attorney can make gifts from the incapable person’s funds on “seasonal” occasions to people to whom the donor of the EPA is related or connected.
Attorneys under a Lasting Power of Attorney (LPA) are authorised to make gifts to a person or charity connected to the donor on “customary occasions” which includes any occasion when presents were customarily given within families.
In either case, gifts must be reasonable, affordable and in the person’s best interests. There is guidance from the OPG as to the meaning of ‘reasonable’ so please contact us for advice if you are unsure if the gift would qualify
For example, if Grandma was in the habit of putting some small cash gifts into the grandchildren’s Christmas cards, you as attorney can carry on this tradition, but bear in mind that the amount of such gifts should meet the above criteria and the authority of the Court of Protection is necessary for larger gifts.
It is important to keep a record of gifts and the situation you make them in, so that you can explain the gifts if you need to.
Whatever your present buying plans, we wish you all a very merry Christmas, and a happy and prosperous new year, from all in the Clarke Willmott Private Capital team.
Contact us on 0345 209 1000 or send an enquiry.
