Gifting this Christmas: Understanding the tax implications

Picture: Getty Images

Picture: Getty Images - Credit: Getty Images/iStockphoto

With increasingly tight restrictions on shopping this year, more of us might be considering gifting money to our relatives at Christmas.

Tim Adams of law firm Moore Barlow. Picture: Moore Barlow

Tim Adams of law firm Moore Barlow. Picture: Moore Barlow - Credit: Archant

But whether you intend to give cash or presents, you need to be aware of possible issues concerning inheritance tax, explains Tim Adams of law firm Moore Barlow.

Q: What is gifting?

A transfer of assets or cash, often to your children, and perhaps with a view to reducing your inheritance tax liability. These need to be clean gifts, without any “reservation of benefit.” For example, people occasionally say they want to give their house to their children but want to continue living in it: the Revenue would say they have not really given it away. Gifting is often carried out on the basis that if you can give something away and then survive for seven years, it won’t suffer inheritance tax on your death. At this time of year, however, it is important to remember there are no exemptions specifically for Christmas presents. If you go above allowable exemptions, you may be storing up an inheritance tax issue if you die within seven years.

Q: How much can I gift to someone?

In principle, everyone can give away up to £3,000 in total a year and, in addition, make “small gifts” of £250 each to individuals. You also have the ability to carry forward unused annual exemption of £3,000 for one year only. So, if you give a child £500 at Christmas then that would be treated as a gift and would have to come within your annual £3,000 gifting allowance. This is whether it is cash or a present – it is the value that is relevant.

Q: What can I give that won’t have an impact on inheritance tax?

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Anything you give to a husband or wife, a charity or a political party is completely free of tax. You can also make gifts to a child when they get married and you can make “regular gifts out of income” if your income is more than sufficient to cover your annual expenditure. But this can be quite difficult to assess and the Revenue like to see there is a regular pattern of giving. Again, this only becomes relevant if someone dies and you look back over seven years and see there wasn’t sufficient income to be giving it away. But it can be a real paperchase so if you are proposing to make regular gifts out of your income, keep records. It makes it so much easier for your family after you have died.

Q: Can I lend money this Christmas without it affecting my allowable exemptions?

Yes, but it needs to be clear it is a loan and not a gift; the recipient needs to show they are paying it back. In tax terms, the loan still counts as money within your estate. But again, the important thing is to record it properly and take advice if you are unsure. It’s amazing how often money changes hands in families and everyone is a bit vague about whether it is a gift or a loan.

Q: So, what is your message this Christmas?

You can give money away but just be aware of the limits and take advice if you are unsure because it is complicated and if you go over your permitted exemptions there could be tax implications if you die. The other issue that can be contentious is if you appear to have dealt with your children quite differently. Quite often parents will respond to a child’s needs and give or lend one of them money when they need it, especially at a time like this when so many people are struggling. But the parents might want to think about doing something in their will to balance things out with their other children after they have died. Also, charities have obviously been very badly hit this year so if you are feeling in a generous mood over Christmas, then why not remember them as well – after all, it is a tax free gift?

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