Christmas gifts – beware of the inheritance tax consequences

Gifting at Christmas is what many of us do especially with family and friends. However, how many of us have stopped to think about whether there are any tax consequences relating to our gifting, especially regarding inheritance tax (IHT)?

The basic rule is that gifts to spouses, civil partners, charities and qualifying political parties are generally exempt from IHT but gifts to other recipients including children and parents may have tax consequences if the level of such gifts exceeds an individual’s IHT allowances.

It is true that there are various exemptions, including small gifts, which allow as many gifts to be given to numerous individuals of no more than £250 per individual donee and these are all exempt from IHT. Furthermore, all taxpayers are eligible to make gifts by reference to each tax year of £3,000 which will, once gifted, fall out of their estates for IHT purposes. Although the level of £3,000 is in addition to the small gifts referred to above, it is important to note that whereas the £250 can be given to many individuals, the level of £3,000 is a total aggregate covering all gifts made by the taxpayer in the relevant tax year.

There is an additional exemption which is commonly referred to as gifts out of income and is, in effect, to treat gifts as normal expenditure out of income. This is the ability to give away an (unlimited) amount by way of gifting an amount which comes from normal expenditure out of income. There are a few conditions to comply with this exemption, namely:-

1. It formed part of the donor’s normal expenditure
2. It was made from post-tax income (taking one year with another), and
3. It left the donor with enough income to maintain his/her normal standard of living.

If a taxpayer uses this relief then evidence will need to be provided so that, if required to do so, the taxpayer can demonstrate to HMRC that the individual’s quality of life is not impacted in any way by the gifts that have been made.

If any gifts are made which exceed the relevant exemptions then the gift may still be treated as “potentially exempt” which means that the individual donor would have to survive seven years before the value of the gift falls outside of their estate for IHT purposes. If this was not the case, then such gifts would, on death, be treated as chargeable and would potentially use up the taxpayer’s nil-rate band which would mean the ultimate IHT liability on the individual’s estate would of course be larger.

As referred to above, it is very important that taxpayers seek advice and keep relevant records, especially regarding gifts being made. For example, recording the gift by way of a letter and sharing that letter with your advisors is one way of ensuring that the record will be retained.

For further information and tax advice, contact rkleiner@geraldedelman.com.