Considering everything that’s happened in 2020, it seems astonishing that it’s now just a couple of months until Christmas. While the season might look slightly different than usual this year, attention will soon turn to thinking about what gifts you want to make.
Last year, a study found that festive expenditure in the UK topped £21 billion, with Brits splashing out an average of £437 per person on Christmas presents. So, as we start to enter the giving season, here are seven gifts you can make that will also help to reduce any Inheritance Tax liability you have.
1. Gifts within your annual exemption
You can give away up to £3,000 each tax year (2020/21) and this money will not form part of your estate for Inheritance Tax purposes. This is an individual exemption and so, as a couple, you can normally gift up to £6,000 a year.
In addition, you can carry any unused exemption forward for one year. So, if you didn’t use your exemption in the 2019/20 tax year, you could gift a total of £6,000 now.
2. Gifts of up to £250
Any gift you make of up to £250 is excluded from your estate for Inheritance Tax purposes, and neither does it count towards your £3,000 annual exemption.
So, for example, if you have six grandchildren, you could gift each of them £250 as a Christmas present each year and it would not be counted as part of your estate.
3. Gifts to your spouse or civil partner
If you’re married or in a civil partnership you can pass your entire estate to your spouse or civil partner when you die. Your surviving spouse/partner can inherit your entire estate without any Inheritance Tax to pay.
You can also pass on your unused tax-free allowance to your surviving spouse or civil partner. For example, if you die and leave all your estate to your husband, he can take your allowance of £325,000 (2020/21 tax year) and add it to his own tax-free allowance.
Note that gifts to an unmarried partner might incur Inheritance Tax.
4. Gifts to anyone, as long as you live for seven years
Under Inheritance Tax rules, you can make a gift to anyone. As long as you live more than seven years from when you make the gift, it will fall outside of your estate for Inheritance Tax purposes.
When you make the gift, it becomes a Potentially Exempt Transfer (PET) and, assuming you live for a further seven years, there will not be any Inheritance Tax due on it.
If you die within seven years of making the gift, it becomes a Chargeable Transfer, and some tax may be payable. The amount of Inheritance Tax you pay tapers between years three and seven so your beneficiaries may pay a reduced amount of tax on such a gift. This is known as ‘taper relief’.
|Years between gift and death||Inheritance Tax paid|
|Less than 3||40%|
|3 – 4||32%|
|4 – 5||24%|
|5 – 6||16%|
|6 – 7||8%|
|More than 7||0%|
It’s therefore important that, for Inheritance Tax purposes, you keep a note of any gifts you make to family or friends. Keep a record of:
- The amount that you gifted
- Who you gave the gift to
- When you gave the gift
During probate, this will help the executor of your estate to work out what is liable for tax.
5. Gifts to a couple on their wedding or civil partnership
You can make a gift to a couple on the event of their wedding and civil partnership and this will be excluded from your estate for Inheritance Tax purposes.
The gift must be made before the wedding, and the wedding must take place. You can gift:
- Up to £5,000 to a child
- Up to £2,500 to a grandchild or great-grandchild
- Up to £1,000 to another family member or friend
6. Gifts to charity
Giving money to charity can be a good way of reducing the amount of Inheritance Tax that you pay. That’s because any cash or physical asset you leave to a qualifying charity, either during your lifetime or in your will, is exempt.
Gifting to charity can reduce the amount of Inheritance Tax you pay in two ways:
- It reduces the value of your estate, meaning that less Inheritance Tax is due
- If gifts to charity are worth at least 10% of the net value of your estate when you die, it reduces the rate of Inheritance Tax payable to 36% (from 40%).
7. Gifts from your income
If you have surplus income for your needs, the Inheritance Tax rules allow an exemption for ‘normal expenditure out of income’. Essentially, it means that you can make regular gifts from your income, such as making pension contributions, or saving for grandchildren.
For this exemption to apply you must meet three conditions:
- The gift must be made out of income ‘taking one year with another’
- The gift formed part of your normal expenditure – this generally means that the gift should be regular in terms of value and frequency
- You should be left with enough income to maintain your standard of living
This exemption can sometimes be difficult to claim, and so it is important that you keep careful and accurate records. You’ll need to retain supporting evidence, and it can be beneficial to document your intent to make regular gifts in writing.
Get in touch
If you’d like advice on making gifts and reducing your potential Inheritance Tax liability, please get in touch. Email firstname.lastname@example.org or call us on 01785 876222.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.