Tax matters: Don't forget to make the most of your tax-free gift allowance

THE festive season is over, meaning it's time to start thinking about tax returns and about using up our annual tax –free gift allowances.

The current economic downturn may dampen these benevolent thoughts but, paradoxically, this may be the perfect time to make those gifts you always wanted to make to charities or family.

Lifetime gifts

If you are looking to give to future generations, now might be the perfect time to do so tax efficiently. Plummeting prices mean the value of your assets could be at their lowest point for some time, and therefore the tax cost of lifetime giving may be minimal, or even nil.

There are two key ways to gift tax efficiently: exempt transfers, which are gifts with a value of less than 3,000 a year, and potentially exempt transfers.

If the value of an investment has dropped below 3,000, you could give this away now with no inheritance tax (IHT) consequences, assuming that no other gifts have been made in the current tax year. Better still, if you didn't use your 3,000 exemption last year it can be carried forward for up to twelve months, so 6,000 could be gifted now, free of IHT (double for married couples).

A potentially exempt transfer, or Pet, is one made during the tax year which is above 3,000 and it will become completely exempt from IHT providing that the donor survives for at least seven years from the date of making the gift.

The good news is that the donee will not be liable to tax on receipt of any of these gifts. But while there may be no IHT, the question of capital gains tax (CGT) still raises its head because even though you are gifting rather than actually selling the asset, HMRC nonetheless considers you to have made a sale at current market value. Currently the first 10,100 of capital gains are tax free, with anything over that charged at a flat rate of 18 per cent. Again the falling value of assets may work in your favour and there may be no CGT to pay upon gifting. Indeed a capital loss may be generated which can be used against future gains.

You could also make use of the "small gifts exemption", whereby you can make an unlimited number of gifts of up to 250 each to family and friends without incurring any tax liability.

Gifts out of surplus income are also exempt. These gifts, which are unlimited in amount, must be made on a regular basis – ie, monthly or quarterly – and should be of an amount which does not diminish your normal standard of living.

Gifts to Charities

Gifts to a registered charity can also be highly tax efficient, particularly for those paying higher rate taxes, as they will result in tax relief at your marginal rate.

If you are concerned about diminishing the value of your assets to pass on to the next generation, you could, in conjunction with making the gift to charity, consider taking out life insurance providing cover of an equivalent amount of the value of the gift.

If the policy is written in trust for your children, the proceeds will fall outside your estate for tax purposes on death with the result that you will have achieved higher rate tax relief on the gift during your lifetime with minimal, if any, impact on those who will inherit from you. For those lucky enough to have income in excess of 150,000 it may make more sense to delay gifts to charity until the start of the next tax year, when relief may be available at 50 per cent on the gift.

• You should always take professional advice before implementing any of the above suggestions.

• Ronnie Ludwig is a partner in Saffery Champness Chartered Accountants. Listen to his podcast at www.saffery.com