Christmas Gifting, Inheritance Tax & Estate Planning

With Christmas fast approaching you might be starting to think about Christmas gifting. Wills and Probate Solicitor, Charlotte Day, discusses Christmas gifting and Inheritance Tax…..

Whilst thinking about the gifts that you are going to make over the Christmas period, it might be beneficial to think more widely about the extent of your estate and whether it would be beneficial from an inheritance tax point of view to make some larger gifts at this point in your life.

What is the 7 year rule?

Every tax year an individual can make gifts of up to £3,000 and this is called the ‘Annual Allowance’ and any unused Annual Allowance from the previous tax year can be pulled forward to this tax year and used.

However, if you make gifts over and above the annual allowance and those gifts are not exempted by any other available allowances, then you will need to survive the next 7 years from the date that you made the gift, in order for them not to be taken into account when calculating whether there is an inheritance tax due on your death.

Can I still make gifts of more than £3,000 in a tax year?

Yes, you can make larger gifts.

Individuals with larger estates who are likely to have to pay some Inheritance Tax on their death may find that making larger lifetime gifts is a good way of reducing the value of their estate. Most often these gifts would be made by relatively healthy and younger clients who are more likely to survive the next 7 years.

If you did make a larger lifetime gift and then survived some, but not all of the next 7 years from the date of the gift, then only part of the gift will be taken into account.

You should however bear in mind that if you didn’t survive the 7 years following the date of the gift, then the recipient of the gift may have to pay some Inheritance Tax on it following your death (if your estate is taxable).

Can I make gifts to avoid having to pay for care?

No, you should not make larger gifts for the purposes of avoiding paying for care. This is known as ‘deprivation of capital’ and you may still be treated as owning assets which you have since given away which can result in debt.

Usually making substantial lifetime gifts or giving away your property later in life is not advised.

What other cash gifts could I make this Christmas?

You can make cash gifts of £250 to as many different people as you want throughout the tax year. This is a great option for those loved ones who are tricky to buy for!

Gifts out of income

If you have surplus income each month then you can make regular gifts out of this surplus income without affecting your Inheritance Tax position. This prevents the income from becoming capital and increasing the value of your taxable estate. However, it is important that the gifts are truly of surplus income and that they are not so large that they start to affect your standard of living.

Gifts in consideration of marriage/ civil partnership

If your child, grandchildren or any other person you know is getting married or entering a civil partnership over Christmas then you can make a gift to them before the marriage as follows:
• £5,000 for a child
• £2,500 for a grandchild
• £1,000 for anyone else

Charitable Gifts

Of course, Christmas is not just a time to give to your loved ones and there may be a charity which is particularly close to your heart. Gifts to charity are exempt for Inheritance Tax purposes, so there will be no detrimental impact on your inheritance tax position.

Gifts with Reservation of Benefit

When you decide to make a gift it is important to ensure that you completely part with the asset to ensure that it is not still considered part of your estate. For example, if you gifted a painting worth £10,000, but decided that you would keep it at your house for ‘safe keeping’, then you won’t have parted with it and the value would still form part of your estate for Inheritance Tax purposes.