Many parents and grandparents choose to gift cash to younger relatives during Christmas, however it is important to consider tax rules when doing this, head of private client at Miller Hendry Solicitors and Estate Agents has warned.
Ernest Boath said that while larger gifts may be taken into account, “anyone can make smaller gifts or gifts out of surplus income without it being taken into account for inheritance tax purposes, as long as some simple rules are followed”.
These kinds of gifts fall into two categories: Gifts where the allowance is automatic if the gift fits the rules; and those where the exemption must be claimed after death, such as gifts out of surplus income. The automatic allowances include gifts to charities or political parties, gifts on marriage or civil ceremony, an annual exemption of £3,000 and small gifts up to £250 per person.
Furthermore, any number of small gifts can be made each year of up to £250 per recipient, with no limit on the number of recipients as long as no one person receives more than £250. If anyone receives more than this amount, the small gift exemption in relation to that recipient is lost for the year, not just the excess.
The annual exemption of £3,000 can be used to make gifts to one or more people. There’s an added benefit if the allowance is not fully used in any year as any remaining allowance can be carried forward one year. It cannot be combined with the small gift exemption for any one individual.
In addition, in any tax year, individuals can give a cash gift when a friend or family gets married or has a civil ceremony. The limit is £5,000 for a child and £2,500 for a grandchild, or £1,000 for those outside immediate family. To help with another person’s living costs, such as an elderly relative or child under 18, individuals can also make payments.
Mr Boath added: “These allowances are automatic, unlike the gifts from surplus income, but even so, it's a good idea to track any gifts as it will help to ensure that you keep inside the rules, and makes it easier in any later dealings with HMRC.”
Record-keeping is ‘essential’ when it comes to relief on gifts from surplus income, as the gift will only qualify for exemption if it is part of a regular pattern of giving, and if you can demonstrate that you maintained your normal standard of living after making the gifts and all other usual expenditure.
Moreover, the exemption for gifts from surplus income must be claimed after death by the executors of a person's will and can be used for any regular payments, such as monthly contributions to a grandchild's savings account or payment of school fees, or making regular gifts on special occasions such as birthdays and Christmas.
Any other gifts made, unless they go into a trust, will be potentially exempt transfers (PETs), which become exempt if you survive the making of the gift by seven years, or the value will be brought into account for inheritance tax purposes.
Mr Boath concluded: “Making gifting part of an annual review is a good idea as the rules do change from time to time, and it's good practice to check back what you've done each year, just as it's important to keep your will up to date as circumstances change.
“And if you've reached the end of inspiration on gift ideas for your spouse or civil partner, it is worth remembering that you can give them as much as you like during your lifetime, as long as they are living permanently in the UK.”
Miller Hendry is a legal and estate agency practice with offices in Dundee, Perth and Crieff.
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