Inheritance Tax  

Making a Christmas gift while keeping HMRC happy

  • Describe some of the pitfalls of making gifts
  • Identify examples that are exempt from IHT
  • Explain what other taxes come into play when making a gift
CPD
Approx.30min
Making a Christmas gift while keeping HMRC happy
 Pexels/Cottonbro

Christmas is the season of giving and thinking of others. Given the lack of opportunities to spend disposable income during 2020, people may be minded to be more generous than usual over the coming weeks.

For those pragmatic souls who would like to extend these altruistic sentiments beyond the festive season, there are many ways of doing so in a tax-efficient manner.

The potential charge to tax

Depending on the value of their estate, those married or in a civil partnership, and who have made no lifetime gifts in the seven years prior to their death, may be able to leave up to £1m to their descendants with no charge to inheritance tax.

The rest of their assets are typically taxed at 40 per cent.

Given that the value of one’s home is included in the assets subjected to tax, it is no surprise that inheritance tax is frequently payable on the estates of those who would not consider themselves to be particularly wealthy. In the spirit of Christmas, here are some suggestions for mitigating this liability.

Any gifts that pass to a spouse or civil partner usually do so free of inheritance tax. The reliefs and exemptions described below relate to gifts to others, for example, parents wishing to pass their assets to their children during their lifetime, rather than after their estate has been reduced by a tax charge.

Although the general rule is that someone must survive a gift by seven years in for any inheritance tax consequences to disappear, this is not always the case.

Annual Exemption. Every individual can make a gift to anyone they like of up to £3,000 each tax year without any inheritance tax implications.

If no gift is made in a particular tax year, or the amount given is less than £3,000, any unused allowance can be carried forward to the following tax year. The allowance can only be carried forward by one tax year, so a maximum of £6,000 can be given away in any given tax year. To make sure this allowance is not wasted, someone who intends to make a gift should make sure they act before the 5 April each year.

Other one-off gifts. Any number of one-off gifts of up to £250 can be made each tax year without giving rise to any charge to inheritance tax. However, if this threshold is exceeded, even by £1, the relief disappears entirely, and the donor must survive seven years from the date of the gift for there to be no inheritance tax consequences. Unlike the annual allowance, it is not possible to carry forward this allowance, meaning it must be used in each tax year otherwise it is lost.

Anyone who is unable to attend a Christmas wedding due to Covid restrictions and is thinking of spending the money instead on a more lavish present for the happy couple, should consider the potential inheritance tax effect of doing so.