As parents, children and teachers count down the days until the start of the summer holidays, those children who are lucky enough to be going away on holiday, might also be lucky enough to receive some holiday pocket money from aunts, uncles and grandparents.
Many who are able to do so like to make gifts to family, particularly the younger generations. Indeed for many, gifting could be a useful habit, particularly where, due to increasing property values or inheritances you have received, your estate may have reached a value where it is potentially liable to Inheritance Tax. Whilst the old adage goes, you should never evade tax, there are ways to mitigate Inheritance Tax liability. Gifting is one way you can, as appropriate, reduce a liability to Inheritance Tax.
The present tax thresholds for Inheritance Tax are £325,000 for an individual, and there is also a Residential Nil Rate Band available, presently £150,000, rising to £175,000 on 6 April 2020, future rises set to be in line with inflation and measured by the Consumer Price Index. The level of Residential Nil Rate Band is directly linked to the value of your property but can be restricted. Estates only qualify for the relief if your property is passing to direct descendants, which the legislation presently sets out as children, step-children, grandchildren, step-grandchildren, adopted children or foster children. Any transfers to nieces and nephews therefore do not qualify. Generally transfers between spouses or civil partners are exempt.
Whilst Nil Rate Bands often appear to be straightforward everyone’s circumstances are different and you should always speak to your Solicitor on such matters.
In the past HMRC’s provisions regarding gifting have sought to be rather more straightforward than new exemptions such as the Residential Nil Rate Band.
A lot of people we meet are aware of the annual allowance available to individuals to make gifts of up to £3,000 per year (tax year). However, many people are not aware of the small gifts allowance, nor allowances on marriage and gifting out of income.
We refer in the main to cash gifts, but a gift can be broadly anything of value and could be cash, paintings, jewellery, investments, cars or property for instance.
In addition to the annual exemption each of us has of £3,000 per tax year, there is also a small gift exemption where you can gift £250 to as many people as you wish during the tax year. The small gift exemption relief is designed to cover Birthday and Christmas gifts, per person. Therefore you cannot gift more than £250 to the same person in the tax year, nor if you have given them a gift using another exemption, say your annual exemption. Relief can also be obtained on gifts made to certain family members in consideration of their marriage or civil partnership. For instance, parents can give a child £5,000, grandparents can give a grandchild £2,500 and anyone else, i.e. for aunts and uncles the limit is £1,000, the gift to be made on or shortly before the marriage or registration of the civil partnership. Only becoming fully effective as an exemption when the event takes place.
A final relief concerned with ‘gifting’ is normal expenditure out of income. Where you have excess income you don’t need in order to live, you can gift away the excess. As is the way with such reliefs however there are conditions applying. One of the key aspects is that the gift should be from your income and anyone making the gift should be leaving themselves with sufficient income to maintain their normal standard of living ie you should not be leaving yourself short just to make substantial gifts to family. If you are in the fortunate position such that due to pensions and investments you have say an annual income of £40,000 in your later years, but maybe only require £30,000 to maintain your standard of living, still enjoy holidays abroad for instance, then you can gift away the excess income. Anyone wishing to set up such pattern of gifting would be advised however to keep records, starting with a note of your annual income and expenditure. As part of the record keeping what people often do is write a letter to those they intend to make a gift to, to confirm their wish to make gifts from their excess income to that individual.
So when the grandchildren come calling for their holiday pocket money, remember you do have annual exemptions available for gifting.
Lynne Hopkins is an Associate in our Private Client department providing specialist advice on Wills, Powers of Attorney and Executry services. If you have any questions about these services please contact Lynne on 01382 229111 or email email@example.com