Christmas is, of course, a time for giving. And whilst tax is rarely the primary reason behind a decision to make a generous gift to family members, it can play a useful role in any inheritance tax planning strategy. However, as you might expect there are strict criteria that must be met.
Gifts between spouses and civil partners are typically tax free, although not to unmarried cohabiting couples. Gifts to charities are also exempt and fall outside of your estate for inheritance tax purposes. Gifts to family members are not limited in size, but to fall outside of your estate for inheritance tax you will need to for seven years after the gift is made.
If a gift is made to a child to perhaps help them on to the property ladder there are further considerations. If you wish to retain some degree of control over the property – perhaps to restrict any future sale or purchased jointly with your child – that gift will not fall outside of your estate. A gift must be just that – a gift with no strings attached.
Additionally, it is possible to make gifts of up to £3,000 a year with no impact on inheritance tax. That might be one gift of £3,000 to one individual or multiple gifts totalling £3,000. HMRC also allows unlimited small gifts of £250 although not to the same person.
HMRC is a little more generous in relation to wedding gifts. It is possible to make a wedding gift of £1,000 to anyone, £2,500 to grandchildren or great-grandchildren and £5,000 to your own children.
Gifts out of income
There is also another gifting route that can helpfully reduce exposure to inheritance tax, called gifts out of income. The rules are, however, a little more complex.
Here, it is possible to make unlimited gifts out of any surplus income you may have. You will need to demonstrate that any gifts made will leave you with sufficient income to maintain your usual standard of living, and the gifts must be part of a regular pattern of giving. Those gifts cannot, however, be made from savings.
The gifting rules have remained largely unchanged since 1981 when the weekly wage was £140 and the average house cost just £23,000. There is a very compelling argument that the Chancellor should review these limits in his Spring Budget, and if he does, that would be a welcome gift for many concerned about their exposure to inheritance tax and who want to help family members.