Gifting at Christmas: A Thoughtful Way to Reduce Inheritance Tax

Associate Leah Woodlee, takes a look at the options available when trying to make gifts to a loved one, to help reduce the value of their estate for Inheritance Tax purposes.

Why more people are choosing cash gifts this Christmas

Many people are choosing not to give a physical wrapped gift under the Christmas tree this year and instead are opting for cash gifts, due to many families struggling with their finances.   

This could be a helpful way to support your family in paying a mortgage/rent payment, paying that overdue utility bill or generally giving them funds to take away their financial stresses.  Gifts can also be a helpful tool to reduce the value of your estate for Inheritance Tax purposes if done in the correct way.  It is also heartwarming to see the funds being used during your lifetime on something that will help your loved ones out.

What counts as a gift for inheritance tax purposes?

An individual has different allowances available and if your estate value is over the allowances, then Inheritance Tax will be payable at a rate of 40%.  If you are in a position to give cash gifts, it is always best to check in with an Inheritance Tax specialist who can provide detailed advice about the value of your estate, what the different allowances are and if any Inheritance Tax that might become payable in the future. They will then be able to assist you in mitigating any Inheritance Tax payable in the future. A brief overview of the gifting implications are below:

• A gift includes, money, household and personal goods, a house land or building, stocks and shares listed on the London Stock Exchange and unlisted shares you held for less than 2 years before your death.
• Did you know that you can gift away a total of £3,000 in each tax year (6 April to 5 April the following year) without the value of the gift being added to your estate for Inheritance Tax purposes and this is known as your annual exemption.  In addition, you can carry forward (for one year only) any unused allowance.
• There is no Inheritance Tax payable on any gifts made to a charity, so this could be the time to leave a generous donation to a charity, that can put the funds to good use at Christmas!
• You can also give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.   Christmas gifts that you give from your regular income are exempt from Inheritance Tax, however if it is out of your capital then it will not be.
• You have a Nil Rate Band allowance of £325k which allows you to make lifetime chargeable transfers within a seven-year period without Inheritance Tax becoming payable. If the gift is not covered by your gifting allowances, then you will need to survive seven years before the gift falls outside of your estate for Inheritance Tax purposes, otherwise it reduces your Nil Rate Band allowance of £325k which can be passed tax free on your passing. If you pass away within the seven years, then there will be Inheritance Tax payable and the amount of tax due depends on the date of the gift. 
• If you gift away an asset, but you still benefit from it (for example, you gift away a property but still live in it) this is called a gift with reservation of benefit and will still count towards your estate value.

Specialist legal inheritance tax advice

Gifting funds out of your estate is complex and it is important to seek advice from a professional before doing so, especially if you are considering large gifts.  It is also worth bearing in mind that if you gift away funds to a person that is in receipt of means-tested benefits, this may change the benefits that they are entitled to. 

If you decide to make any gifts, then it is important to keep a note of the date the gift is made and who it is to.  That way if you do pass away, your executors who will deal with your estate when you pass, can review the information to see whether or not the gifts fall outside of your estate value or not.

If you would like to book an appointment to get Inheritance Tax advice, Holmes & Hills have specialists who are able to assist and advise.