Christmas shopping usually means a visit to the high street or browsing online retailers, but the season of giving can be a good time to make sure you are maximising your opportunities to reduce your potential inheritance tax liability.
Anyone can make small gifts, or gifts out of surplus income, without them being considered for inheritance tax purposes, providing some simple rules are followed.
Any number of so-called ‘small gifts’ can be made each year, of up to £250 per recipient, with no limit on the number of recipients, providing no one person receives more than £250.
The annual exemption of £3,000 can be used to make gifts to one or more people. There is an added benefit if the allowance is not fully used in any year, as any remaining allowance can be carried forward one year. It cannot be combined with the small gift exemption for any one individual.
You can also make payments to help with another person’s living costs, such as an elderly relative or a child under 18.
And if giving to charity is important to you at Christmas, gifts to charities (and political parties!) will not count towards the total taxable value of your estate. You can also cut the inheritance tax rate on the rest of your estate from 40% to 36%, if you leave at least 10% of your 'net estate' to a charity.
As regards gifts from surplus income, record-keeping is essential. You need to record your intention in writing, setting out that you mean to make the gifts regularly, and then keep a record of income and outgoings to demonstrate the money you gave was indeed out of surplus income.
The exemption can be used for any regular payments, such as monthly contributions to a grandchild’s savings account or payment of school fees, or making regular gifts on special occasions such as birthdays and Christmas.
Generally speaking, any other gifts will be brought into account for inheritance tax purposes in the event of your death, unless you survive the making of the gift by seven years.
Making gifting part of an annual review is a good idea. The rules change occasionally, and it is good practice to check what you’ve done each year, just as it’s important to keep your Will up to date as circumstances change.
This is not legal advice; it is intended to provide information of general interest about current legal issues.