Tax exempt gifts at Christmas

Christmas is a time when friends and family come together and often swap presents between loved ones. Many people this year are still feeling the financial repercussions of COVID-19 and are deciding to gift away cash gifts, rather than physical presents this year.

Whether you want to help by paying for a loved one’s mortgage for a year, help pay utility bills or just generally give them cash to enable them to have a splurge, it is important to consider any Inheritance Tax implications on giving away sums of money.

What if you die within seven years of making a gift?

Executors will be appointed under your will - people you have chosen to deal with the administration of your estate when you pass away. They will have to consider whether any gifts that you have made need to be brought back into your estate when valuing your estate for Inheritance Tax purposes.

It is therefore important to make a list of any gifts of cash that you give away and list the date the gift is made, to whom and for what purpose. That way your executors will have a clear understanding about what gifts may have to be declared on your tax papers.

There are several tax allowances available and below are a few:

Gifts to spouses or civil partners

Currently, you do not have to pay Inheritance Tax on any gifts made between spouses or civil partners, so long as they are legally married and they live in the UK permanently.

Annual exemption

Everyone has an annual exemption, which means that they can give away up to £3,000 worth of gifts in each tax year. A tax year runs from 6 April to 5 April the following year. You can gift away a total of £3,000 worth of gifts to one person, or split it between several people.

Another tax advantage is that you can carry forward any unused tax allowance for the previous year, to enable you to increase the amount that you are able to gift away. 

Gifts to charities and political parties

There is no Inheritance Tax to pay on any gifts you give to charities or political parties.

Small gift allowance

You can give away as many gifts of £250 per person, as you would like in any tax year, so long as you have not claimed another allowance on the same person.

What will be brought into your estate?

If you decide to give away an asset, but you still benefit in some way from the asset, then the asset will count towards the value of your estate. 

For example, if you gift away a property to someone, but you are to remain in the property, then this is a gift with reservation of benefit and will be brought back into your estate when calculating the value of an estate.

It is therefore important that before you decide to gift away a large asset, that you get specialist advice as to the possible Inheritance Tax implications on doing so.

If you would like to speak to a specialist about leaving tax exempt gifts this Christmas, then please contact me. I am based in our Colchester office and can be contacted on [email protected].