Gifting money to friends and family is a common occurrence at Christmas. It’s the perfect way to show you care without having to provide a receipt. However, for those looking to give a bit more than a £20 note, inheritance tax is something that must be considered – no matter how uncomfortable the thought may be.
In simple terms, inheritance tax is a tax on your assets when you die. A recipient of a gift can also become liable to pay inheritance tax if a gift had been made to them over a certain amount and the giver has then died within seven years. The gift can be anything that has a value, whether money, property or possessions.
In any tax year, a person is able to give away a cumulative total of £3,000, this is known as the annual gift allowance. People can also make as many small gifts under £250 to different people as they want.
Should a person choose to give over £3,000 in any one tax year, the seven-year rule comes into play, meaning they must survive for seven years after that gift has been given in order for it to be exempt from inheritance tax. If a person dies within seven years, the value of the gift is counted back into their estate when calculating the inheritance tax due. Such gifts will use up the tax-free allowance (nil rate band) available on their death and, if the value of the gifts exceeds this allowance tax, will be payable on the gifts. The tax payable is then tapered if it has been more than three years since the date of the gift. Generally, the recipient is liable to pay this tax.
For example, a grandparent wishes to give gifts to their four grandchildren this Christmas. If they choose to give them £250 each, or £3000 to share between them all – as long as they have not made any other gifts in this tax year – then there are no inheritance tax consequences. However, if they wanted to be extremely generous, and made a gift of £10,000 to the four grandchildren, they would have to thoroughly consider the seven-year rule. If they died within seven years, the gift may not be exempt from inheritance tax, leaving the grandchildren having to pay back a percentage value of the gift. An unintended consequence of what was a thoughtful present at the time.
There are some gifts that don’t follow the usual rules for inheritance tax. These include donations to charity and some gifts for marriages or civil partnerships, depending on the person’s relationship to the couple. Gifts between married couples or those in civil partnerships are also always exempt, no matter the cost, so no need to worry about being extra generous this Christmas!
When planning Christmas presents, there is no one size fits all way to avoid inheritance tax on expensive gifts. After all, nobody can be entirely sure that they will survive for seven years after the event.
However, there is also the option of using ‘excess income’. If a person can prove that the level of income they have meets all of their living costs, and that their standard of living can be maintained, then it may be possible to claim an exemption for inheritance tax. To qualify for this exemption, there must be a regular pattern to this gifting, for example, the payment of annual school fees for a grandchild.
For anyone considering a large gift this Christmas, they must make sure that the person, or their guardian, are aware of the potential consequences to ensure they are not put inadvertently into a difficult financial position. A highly complex situation can be created if the giver dies before the seven-year mark, with the person dealing with their estate needing to account for all of these gifts within the inheritance tax return. Without a complete gifting schedule, a whole host of challenges can arise for those left behind.
Nevertheless, as long as the giver is aware of the inheritance tax consequences and keeps good records, inheritance tax does not have to be the nightmare after Christmas.
Suzanne Leggott, partner in the private client team at law firm, Shakespeare Martineau
