Yes, it is that time of the year again, Christmas is around the corner and dad is already deciding on how to add to the pestle and mortar collection for mum (refer back to my last Christmas’s article). To quote D:Ream, “Things can only get better” or I sincerely hope they do.

Stay with me here.

If you are in the camp of “yeah just give them money” as a Christmas present, then you may well be hitting two birds with one stone. Whilst I do not advocate this cop out of a present, this could very well be advantageous to both sides. On the one side, someone will receive some money rather than, for example, I don’t know, a pestle and mortar say, and on the other side, someone will be reducing their estate value for IHT purposes (which is why we all do it right?).

Between April and August 2023 HMRC collected £3.2bn in Inheritance Tax (IHT) which was around £300m higher than the in the same period last year. With the asset levels continuing to increase, the IHT tax free levels are set to remain frozen until 2027/28 which could potentially mean that you could be dragged into this arena without realising.

As a recap, you have a nil rate band of £325,000 (for married couples this is £650,000) meaning that up to this figure, your estate is not subject to IHT but any value of over this is taxed at 40%. There is also the residence nil rate band, which subject to certain criteria being met, adds a further £175,000 per person (£350,000 for married couples) to your estates value. All in all, you could have up to £500,000 before any IHT is levied (£1m for married couples).

Where does gifting fit into this?

A gift can include anything such as money, household or personal goods, stocks and shares or a house, land or buildings. Gifting between spouses or civil partners does not attract any IHT as long as they live in the UK permanently and there is also no IHT to pay on gifts to charities or political parties.

Many will be familiar with the 7-year rule with gifting, usually with larger sums to try and reduce the value of assets, but there are some ways to gift money/assets which do not attract any IHT or 7-year ruling which should be considered if you wish to make gifts but on a smaller scale.

1. Annual Exemption – you can gift £3,000 without it being assessed for IHT. This can be one gift to one person or a number of gifts to a number of people, so long as the total does not exceed £3,000. If you have not used this in the previous tax year, then you can carry forward this allowance.
2. Small Gifts – you can make as many gifts of up to £250 per person as you wish each tax year so long as you have not used another allowance on the same person.
3. Weddings/Civil Partnerships – You can gift sums to anyone who gets married or starts a civil partnership. These sums are, £5,000 for your child, £2,500 for your grandchild or great-grandchild and £1,000 to anyone. Notably, these can be combined with any other allowance except the small gift allowance.
4. Gifts from Income – You can make regular payments from your income so long as you can afford the payments after meeting your living costs and that you pay these amounts from your regular monthly income. Again, you can combine this allowance with any other allowance except the small gift allowance.

 

But rather than just doing this at Christmas, these allowances allow you to make gifts all year round for different occasions and is a win-win for all parties.

One side can get money and not a pestle and mortar and the other can slowly start reducing their estate value.

Happy Christmas!

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