Are you giving cash gifts this Christmas?
Posted on 9th December 2022
Reducing inheritance tax
You can give away as much as you wish, but there are inheritance tax (IHT) rules concerning lifetime gifts.
When done in the right way your loved ones can benefit now and less inheritance tax will need to be paid when you die because you have reduced the size of your estate.
Your ‘estate’ includes property you own, your possessions and your money. There is an allowance of £325,000 when you die, then IHT is paid at 40% on any amount above this sum. If your estate is worth more than £325,000 your beneficiaries are effectively taxed on what you leave them.
IHT also applies to gifts you make in your lifetime, so it’s helpful to understand the rules when you are thinking about giving gifts with a financial value.
The seven-year rule
The amount you give away as a gift doesn’t always reduce the value of your estate immediately for IHT. Some gifts take seven years to leave your estate for tax purposes. This depends on the value of the gift and who you give it to.
Small gifts – you can give away up to £250 to as many people as you like at any time of the year, not just at Christmas, as long as each person only receives one gift per year. IHT isn’t paid on these gifts when you give them and the amount leaves your estate straight away.
Weddings – if your friends or relatives have plans for a winter wedding you can give tax-free wedding gifts. For your children you can give up to £5,000, your grandchildren up to £2,500 and your friends up to £1,000.
Large gifts – if you want to help a family member buy a house in the new year, for example, you can gift a larger amount. You can give up to £3,000 each year without paying IHT. This is known as your annual exempt amount. You can split the amount between as many people as you like, and the amount will leave your estate straight away.
If you’re married or in a partnership, you and your husband, wife or civil partner could jointly give up to £6,000 per year by both using your annual exempt amounts. If you didn’t use your annual exempt amount one year, you can carry it forward to next year, but only for one year.
So, you could give a child a wedding gift of £5,000 and use your £3,000 annual exempt amount too. However, you can’t add a small gift or an unused allowance from a previous year for the same person.
Gifts from your income – there’s also a gift exemption for normal expenditure out of your income. You can regularly give away money you can spare from your income if it won’t affect your normal standard of living. IHT won’t be payable and you don’t have to wait seven years for the money to leave your estate.
Even larger gifts – money that isn’t covered by an exemption or which goes in to a trust rather than to an individual can take seven years to leave your estate. If you die within seven years IHT will be payable, depending on the value of the gift and when you made it.
It’s important to keep a record of any gifts you make, whether at Christmas or another time. This will help whoever administers your estate when you die to report all your gifts accurately to HMRC and make sure the right amount of IHT is paid.
Please get in touch for advice if you are thinking of giving money or valuable assets as gifts this Christmas.
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