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

Gifts to a couple to celebrate their wedding or civil partnership are exempt from inheritance tax, the amount determined by the relationship of the donor to one of the parties getting married.

Each parent may give £5,000 tax-free - while the figure is reduced to £2,500 per grandparent or great-grandparent and to £1,000 for anyone else. The gift must be made in contemplation of the event, or on the day, as unfortunately the exemption does not apply to gifts made after.

Gifts from surplus income

Individuals who receive more income than they spend could reduce the inheritance tax liability on their death by regularly giving the surplus income to others.

If the recipients of these funds are the same as the beneficiaries of their will, the effect is that the beneficiary will receive 100 per cent of the intended gift, rather than the amount that remains once inheritance tax has been applied.

This is a valuable relief because there is no upper limit on the amount that can be gifted and there is no “seven-year clock”. Given this, there are conditions that must be met for HMRC to accept that the gifts are not subject to tax.

Foremost among them is the need to show that the donor can continue their ordinary standard of living, by using income only, having made the gifts. It is also important to show an intention to make the gifts regularly, documenting this intention and ideally following through.

Grandparents making a Christmas undertaking that the cost of a grandchild’s education would be met every year is a good example of making a gift on a regular basis

A warning from Scrooge: the evidence required by HMRC to apply the relief is extensive and includes details of the donor’s annual income and expenditure on costs such as insurance, household bills and council tax. It is consequently important for accurate and detailed records to be kept of one’s income and expenditure to allow the donor’s executors to prove that the relief applies.

Gifts to charities

Some good news. A Christmas gift to a charity registered in the UK or in the EU of any amount, at any time, has no inheritance tax charge attached. This exemption applies both to gifts made during one’s lifetime or under the terms of a Will.

Indeed, if the terms of the will state that at least 10 per cent of one’s net estate is to pass to charity the rate of tax that applies to the balance of the estate is reduced from 40 per cent to 36 per cent. There is no compulsion to limit the number of charities to which the payments are made.

This means the testator can specify that one charity receive 10 per cent of their net estate or that ten charities each receive 1 per cent.