At this time of year gifts are at the forefront of most peoples’ minds, the shops are open late and the twinkling of Christmas lights is spreading throughout the streets and houses around us. For those of us that have been putting it off, the inevitability of having to purchase Christmas gifts is upon us and gift ideas seem to be more of a struggle year on year.
The recent Budget didn’t offer up too many gifts for taxpayers, the most noticeable offering was the abolishment of Stamp Duty Land Tax for many first time buyers. Anyone who was about to purchase their first home will certainly be happy to have received that gift from the Chancellor!
Christmas is a time of giving and many choose to make a gift to charity. Such a gift will be exempt from Inheritance Tax without limitation, but perhaps more pertinent is the Income Tax relief that a higher rate tax payer will obtain under the Gift Aid scheme.
There is often uncertainty surrounding how much can be gifted to family considering tax implications; put simply any amount of cash can be given and there will be no tax payable at the time the gift is made. Some gifts will be immediately outside of your estate for Inheritance Tax purposes whereas others will require you to survive for seven years from the date the gift was made.
A programme of lifetime giving is an effective way to reduce your estate’s exposure to Inheritance Tax. Gifting £3,000 each year to the next generation will immediately save IHT on your death, regardless of how long you survive. This annual exemption can only be carried forward for one year, so if you have made no gifts in the previous tax year you can gift £6,000 in the current year and this gift will be immediately exempt, but if you wait until after 5th April to do so the earlier year’s exemption will be lost.
You can also make an unlimited number of gifts of £250 to different recipients in the year and these will also be exempt from Inheritance Tax, regardless of how long you survive.
In addition, if you have surplus income in the tax year and have enough money to maintain your lifestyle, then you can make unrestricted regular gifts from this surplus income and again you are not required to survive the gifts by seven years for them to escape Inheritance Tax.
Your generosity doesn’t need to stop there; you can give away more than the exemptions detailed above however if you were to pass away within the succeeding seven years, the gift in excess of the exemptions would be added back into your estate for Inheritance Tax purposes. Your Inheritance Tax position would not be any worse than it was originally, you would simply be taxed as if the gift had not happened.
Gifts of cash do not trigger any Capital Gains Tax liability but if you wanted to make a gift of assets, such as investments or property you should seek professional advice, as often with some simple planning and the use of trusts, tax liabilities can be reduced or even mitigated entirely.
If you have assets that will increase in value then they should be gifted sooner rather than later. It is the value at the date of the gift that would be added back into your estate if you did not survive seven years, so any appreciation in value escapes Inheritance Tax immediately.
While the season of giving is here it is worth bearing in mind your Inheritance Tax and Income Tax position. Gifting not only puts smiles on peoples’ faces, but also improves your own tax position.
At David Allen we pride ourselves on providing bespoke advice truly specific to the needs of each client we work with. Inheritance Tax planning may not be top of your Christmas list but the start of a new year is a good time to assess your position and take action to give you and your family peace of mind.
Posted: December 8th, 2017