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Gifting money this Christmas? Here’s why you should keep Inheritance Tax in mind

Gifting money is the perfect way to support your loved ones at Christmas. Learn why you need to keep Inheritance Tax in mind when giving cash gifts.

11/12/2023
Benchmark customer focused

Christmas is the season for giving and you may be looking forward to buying all sorts of amazing gifts for your family and friends. But we all have people in our lives who are difficult to buy for.

That’s why cash is such a great option, because they can decide how they spend the money themselves. It can also be a great way to help your loved ones work towards their financial goals, so they see the benefit of the gift for years to come.

However, it’s important that you consider the tax implications of gifting and how it could affect your financial plan. The good news is, gifting could help you reduce Inheritance Tax (IHT) in the future, but only if you pass on wealth in certain ways.

Read on to learn why you should keep IHT in mind if you are gifting cash this Christmas.

You could be more likely to pay IHT in the future

Finding tax-efficient ways to pass your wealth on to loved ones is usually an important part of most people’s financial plans. At the moment, it might be even more crucial because the likelihood of your family paying IHT on your estate could be growing.

In his 2023 Spring Budget, Jeremy Hunt announced that the IHT “nil-rate bands” – the amount you can pass on without IHT – would be frozen until at least 2028.

This means that, until then, you can pass on £325,000 without triggering an IHT charge. You may also benefit from an additional £175,000 “residence nil-rate band” when passing your main home to a direct descendant such as a child or grandchild.

While this may seem like a lot, it might be easier than you think for your estate to exceed your nil-rate bands, meaning that your family pay IHT on it.

For example, according to the Office for National Statistics (ONS), the average UK house price in September 2023 was £291,000.

When you consider the value of any savings and investments on top of the value of your home, you may find that your family are more likely to pay IHT than you realised. It’s also important to remember that the value of your estate may increase as property prices rise and you potentially see returns on your investments.

We have already seen the effects of frozen nil-rate bands, as FTAdviser reports that IHT receipts between April and September 2023 were £400 million higher than the same period last year.

Fortunately, gifting money this Christmas may help you reduce the chances of an IHT bill in the future.

You have a £3,000 annual gifting exemption

When you gift money to your loved ones this year, you may be able to reduce the size of your estate, which could potentially help your family avoid IHT later.

In the 2023/24 tax year, you have an “annual gifting exemption”, allowing you to gift up to £3,000 each tax year. This amount automatically falls outside of your estate for IHT purposes.

Your spouse or civil partner also has this exemption, allowing you to essentially double your tax-free gifts to up to £6,000. Furthermore, you can carry any unused exemption forward from the previous tax year, meaning you could theoretically gift up to £12,000 in a single tax year without this money counting towards your estate.

Additionally, under the small gift rules, you can make as many gifts of up to £250 per person as you like each tax year, provided you have not used any of your annual gifting exemption on them already.

This may be a simple way to give cash gifts without incurring a tax charge.

Larger cash gifts may only be IHT-free if you survive for 7 years after making the gift

If you want to gift more than £3,000 in a single tax year, you may still be able to avoid IHT. However, there are specific rules you may need to be aware of.

Any gifts beyond your annual gifting exemption are known as “potentially exempt transfers (PETs)” because they are not automatically exempt from IHT.

If you survive for seven years after giving the gift, those funds become exempt from IHT. However, if you survive for less than three years, that money may be subject to IHT at the full 40%.

IHT is payable on a sliding scale if you die between three and seven years after giving the gift. This is known as “taper relief” and your family could pay a rate of IHT as shown in the table below:

Years between gift and death

Rate of IHT on the gift

3 to 4 years

32%

4 to 5 years

24%

5 to 6 years

16%

6 to 7 years

8%

7 years or more

0%

Source: HMRC

Bear in mind that PETs will be the first element of your wealth calculated against your nil-rate band, meaning you may not benefit from taper relief even if you die before the seven-year threshold.

That said, if you make the gift earlier in life, you may be more likely to survive for seven years and help your family reduce IHT.

The “gifts from income” exemption could help you support your loved ones

A gift at Christmas could be very welcome, but you might want to think about ways that you can offer continued support to your loved ones beyond the festive season too.

The “gifts from income” exemption allows you to make regular gifts that fall outside your estate for IHT purposes.

You might decide to start a Junior ISA (JISA) or a pension for your child or grandchild this Christmas, for example, and you can continue making regular contributions using this exemption.

However, the gift is only free from IHT provided it:

  • Is regular
  • Comes from your regular income and not your other savings
  • Does not require you to make sacrifices to your lifestyle.

Making regular contributions to a JISA or pension is a brilliant way to give the gift of financial stability to a child or grandchild, and they might benefit from powerful compound returns too.

Get in touch

If you plan to give some cash gifts over Christmas, we can help you consider the tax implications.

Please visit our contact page on our website to find an adviser near you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate planning or tax planning.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.

Important information

The views and opinions contained herein are those of Benchmark Financial Planning. They do not necessarily represent views expressed or reflected in other Benchmark Financial Planning communications, strategies or funds and are subject to change. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable, but Benchmark Financial Planning does not warrant its completeness or accuracy. The data has been sourced by Benchmark Financial Planning and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. Benchmark Financial Planning is not responsible for the accuracy of the information contained within linked sites. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

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Benchmark Financial Planning is an Appointed Representative of Best Practice IFA Group Limited which is authorised and regulated by the Financial Conduct Authority, the registration number is 223112. Registered office: Broadlands Business Campus, Langhurst Wood Road, Horsham, West Sussex, RH12 4QP. Registered in England and Wales No 07572431.

The Financial Ombudsman Service is available to sort out individual complaints that clients and financial services businesses aren't able to resolve themselves. To contact the Financial Ombudsman Service, please visit www.financial-ombudsman.org.uk

The guidance and/or advice contained within this website are subject to the UK regulatory regime and are therefore targeted at consumers based in the UK.