Keep good records of monetary presents, says Lianne Lodge
WITH more than ten weeks until Christmas, it may seem premature to talk about making gifts. However, over the festive season we make more gifts than at any other point throughout the year. For anyone considering making a substantial gift this year, then while it’s not quite yet the season to be jolly, it is certainly the season to be planning to ensure that any gifting is tax-efficient.
If someone makes a gift, then dies within seven years of making the gift, the value will be added back to the deceased’s estate when calculating any inheritance tax liability. There are a few well-known exceptions to this rule which are:- Annual exemption – you can give away up to £3,000 each year without having to worry about it coming back in to your estate. Even better news is that if you haven’t used your full exemption last year, it rolls forward, meaning you could make gifts of up to £6,000 this year. Small gifts – additional gifts of up to £250 can be made to as many people (children/grandchildren/friends) as you like without the value falling back in to your estate if death follows within seven years. Gifts in consideration of marriage/civil partnership – Christmas weddings are becoming increasingly popular. Parents can each give gifts of up to £5000, grandparents and other relatives £2,500 and anyone else £1,000 to the bride or groom.
Taper relief may be available depending on the length of time between the gift and the gifter’s death, but remember that this only reduces the tax due, if any, and not the value of the gift.
A lesser-used exemption is gifts out of excess income. To achieve this exemption, the gift must:- 1 Be out of income, not capital. This can be an issue for those with relatively high levels of capital and little income, for example, pensioners. It may be possible to structure investments differently to generate a higher income if this is a concern; however, the sale of investments will not count as income for these purposes. 2 Be out of excess or surplus income. This means that the gifter must be able to maintain their usual standard of living and not have it affected by the making of the gift. 3 HMRC require that the gifts should form part of a pattern or habit. Therefore, consider making a gift every year/quarter/month. You don’t actually have to make a gift if there is no excess income. If this is your first year gifting, make a note that you intend to review the position next year to show that you intend it to become a habit.
For anyone meeting these conditions, there is no limit to the value of the gift (other than the amount of excess income available). I have seen this work in practice where a mother gifted each of her two children £50,000 every Christmas (yes, she did have a rather large income!). On her death, the Revenue were informed of this gifting over the past seven years totalling £700,000. The records were all there showing that the income/expenditure allowed this level of gifting and, therefore, the £700,000 was not subject to inheritance tax, saving over £250,000.
While that may be an extreme example, the theory is sound for more modest incomes, for example, if someone wants to pay regularly into an account for grandchildren.
The claim is not automatic and the deceased’s executors would have to claim after the gifter had died. It is imperative that good records are kept. For a claim to be successful, the Revenue will want information for the year in question on income from all sources (salary, pensions, investment, annuities, rental income etc) and expenditure (eg rent/mortgage, household expenses, holiday, entertainment, travel costs etc).
Finally, thought should be given to the recipient of the gift. If they are vulnerable because of age, illness or any other reason you could consider setting up a trust to protect the beneficiary from the risks of them owning the assets or gifts outright. One client I had was considering gifting in to their child’s pension rather than making the gift outright as she felt that a pension would be “the gift that kept on giving”.
There are lots of options available to ensure that you can feel comfortable that your gift will be well protected in addition to being well received!
My final word of warning would be to ensure that clear records are kept, as outlined above to avoid the Grinch from spoiling your Christmas gifting!
• Lianne Lodge is an associate in the private client team at Gillespie Macandrew www.gillespiemacandrew.co.uk