Wealth of Advice, Swale House, Mandale Business Park, Durham, DH1 1TH
Christmas is a time for family, generosity and reflection. In turn this can make many people begin thinking more seriously about their finances, particularly how to support children, grandchildren or wider family members.
Every year, in the first week of January, we are inundated with enquiries from people who want to understand the rules around gifting and inheritance tax (IHT). The good news is that with the right approach, Christmas can be an excellent opportunity to make gifts in a tax-efficient way.
This article accompanies Episode 49 of the Retire Well with Wealth of Advice podcast and explains how gifts work, the various exemptions available, how to record them properly, and the traps to avoid.
Before looking at the rules, it is essential to understand what HMRC considers a gift.
A gift is an outright, irrevocable transfer of money, assets or value. To qualify, the donor must not continue to benefit from the asset after gifting it.
If the donor still benefits, the gift can fall foul of one of two rules:
These rules will be explored in a later episode, but for now it is important to recognise that a gift is only a true gift if the donor gives up all benefit.
Good record-keeping is essential.
You should record:
If you die within seven years, executors will need this information to complete the IHT403 form, which records lifetime transfers. Without accurate records, it can be difficult for your estate to claim available exemptions.
The UK offers several exemptions that allow people to gift money or assets which allow them to fall outside of your estate immediately.
Transfers between spouses or civil partners are fully exempt, both during lifetime and on death.
You can give up to £250 per recipient each tax year.
Conditions:
These exemptions apply per donor, per event:
These include:
These gifts are exempt when they meet the criteria and are considered part of normal family responsibility.
These gifts are fully exempt, regardless of size.
One of the most generous exemptions is gifting out of surplus income.
There is no monetary limit, provided the gift meets all of the following tests:
Investment bond withdrawals are often wrongly assumed to be income. They are typically treated as return of capital, so do not qualify.
Most lifetime gifts that do not fall within an exemption are classed as Potentially Exempt Transfers.
Key points:
Many people question the fairness of PETs, but without this rule individuals could give everything away on their deathbed and avoid IHT entirely.
Gifts into most discretionary trusts or relevant property trusts are classed as CLTs.
Key features:
If you create both PETs and CLTs, the order matters.
For larger or more complex gifting strategies, advice is essential to avoid unexpected charges.
Trusts can be extremely effective when used correctly, particularly for families wanting more control over how gifts are used.
The choice depends on your objectives:
Trusts can ensure money is used for education, housing, or specific needs, and for future generations.
Discretionary trusts face:
Trusts pay income tax at 45 per cent, meaning investment bonds are often preferred because they generate no ongoing income within the trust.
Christmas gifting can be far more than a generous gesture. It can also be a powerful way to support loved ones while reducing the future value of your estate for IHT purposes.
The key is understanding the rules, using the exemptions available, recording gifts properly, and ensuring you do not accidentally trigger unwanted tax consequences.
Whether you are making small seasonal gifts or planning a long-term family wealth strategy, Christmas is an excellent time to take stock and plan ahead.
If you are considering making gifts this Christmas or want to understand how gifting fits into your wider estate plan, Wealth of Advice can help.
We can guide you through the rules, explain your options clearly, and help you gift in a way that is both meaningful and tax-efficient.
Feel free to get in touch to discuss your plans.
If you want a better view of what your future could be, we'll have a chat and work out if we make a good fit for you and your financial picture.
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