Making sure more of your money goes to loved ones…
With all the pressures on people’s finances at the moment, you may be thinking that the most welcome Christmas present for some friends or family members this year might be simply some cash…
It’s a great position to be in if you can afford such a gift – but you need to make sure there aren’t any unintended consequences from the HMRC.
The issue is about the scale of your generosity and whether the amount you’d like to give could be deemed ‘part of your estate’ if you pass away within seven years of making the gift, and therefore subject to inheritance tax.
This is where it’s important to know about “allowances”. HMRC rules allow anyone to gift £3,000 (or £6,000 between them if the givers are a married/civil partnership couple) per year, without any implications for inheritance tax. This is known as an ‘annual exemption.’
Unused annual gift exemptions can also be carried forward to the next year – but only for one tax year. And they relate to the total YOU (or the two of you) can gift – if you want to treat more than one person, you will need to divide the £3,000 (or £6,000) between them – you can’t give the whole sum to several people.
Your money, your choice
But it still means more of your money going to your loved ones – and it can add up to a substantial sum: if in 10 years you and your spouse both died in the same year and no annual gifts had ever been made, then this ‘pot ‘of £60k would form part of your estate.
Inheritance tax of 40% is generally charged on estates of over £650,000 for a married couple (£325,00 for each of you – covering all monies, the value of any property to be sold and personal possessions. Taking this potential ‘pot’ of annual gift allowances out of that could mean a tax saving of up to £24,000 (£60k x 40% inheritance tax = £24k).
Marriage/Civil Partnership exemptions
In a separate, additional provision, there is also an exemption for gifts to someone getting married or starting a civil partnership. Again, it applies to one specific tax year – and the sums are:
- £5,000 to your child getting married/entering a civil partnership
- £2,500 to your grandchild or great-grandchild getting married/entering a civil partnership
- £1,000 to any other person (perhaps a niece/nephew or close family friend) getting married/entering a civil partnership
Small Gift Allowance
You can also give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.
Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax.
Gift Aid – donations
And there are other ways to ‘give’ too. If you are a higher rate taxpayer, the government will give you a tax break for making donations to charitable organisations.
In short, in any year a donation is made, your basic rate band will be extended by the amount of the donation. This means you will pay more tax at 20% and less tax at 40% – and there is no limit to the value of your donation.
As with all tax matters, getting the right advice is key. So, if you’d like to check out your options, why not call our taxation expert Chris Regnauld for a no obligation chat.
Wishing you a happy and peaceful Christmas – and good health and prosperity in 2023.