According to the Bank of England, a typical household spends an additional £800 in December. Figures from voucher company, RetailMeNot, also suggest that UK households usually spend an average of £473.83 of that sum on presents.
Of course, Christmas is a time for gifting. So, in this festive spirit, we thought we’d share three of the most popular financial gifts that you can make at this (or any!) time of year.
1. Gift to reduce the value of your estate
There are lots of reasons that we give gifts. It can be to build or reinforce relationships, to help others or to show love and devotion.
On a more practical level, making gifts is also a way of reducing the value of your estate for Inheritance Tax (IHT) purposes. There are several ways that you can give gifts that mitigate any IHT liability:
- Gifts to a spouse or civil partner – No IHT is payable on transfers between most married couples or civil partners in the UK. Effectively the amount liable to IHT is deferred until the death of the second spouse/civil partner.
- Gifts under the ‘annual exemption’ – Each individual can give away up to £3,000 in total, every tax year, free from IHT. This allowance can be backdated by one year and so you can carry forward any unused allowance to the next tax year. So, a married couple could give away £6,000 to their children each tax year, and £12,000 if a previous year’s allowance has not been used.
- Small gifts – Gifts of up to £250 in value are exempt from IHT (as long as you’re not gifting to someone you’ve already used your £3,000 allowance on).
- Gifts on marriage – Any gifts you make in consideration of a marriage or civil partnership are exempt from IHT, as long as you make the gift before the wedding and the wedding goes ahead. You can gift up to £5,000 to a child, £2,500 to a grandchild, and £1,000 to anyone else.
- Gifts to charity – Any gifts to charities, universities or political parties are exempt from IHT, whether you make them in your lifetime or leave them as a legacy in your will.
2. Gift to your children and grandchildren
If you don’t want to buy your child or grandchild the latest Frozen toy or LEGO set this Christmas, you could consider making a financial gift.
As a parent, you’re able to contribute up to £4,368 into your child’s Junior ISA before 6 April 2020, as long as they were born after 3 January 2011 (or before 31 August 2002). Depending on your needs and our risk profile, you have a choice of either Cash or Stocks and Shares ISAs, and any returns are free of both Income Tax and Capital Gains Tax.
Note that only parents and not grandparents can open a Junior ISA.
Another option for a young child is to consider starting a pension. You can contribute up to £2,880 each tax year into a pension for a younger child, with the 20% tax relief available taking the total contribution to £3,600.
Saq Hussein from accountants PwC says: “Assuming it is a newborn child and you pay the £2,880 in for 18 years, by the time the child retires the pension could be worth more than £1 million in today’s money. It is worth noting, however, that under current rules the child would not be able to access the money until they retired.”
If you’re thinking of making a financial gift to your child or grandchild, then Premium Bonds are also an option.
Anyone aged 16 or over can buy them, and parents, legal guardians, grandparents and great-grandparents can invest on behalf of their child, grandchild or great-grandchild aged under 16.
You’ll need to nominate a parent or legal guardian to be in charge of the Bonds until the child is 16 – they will be sent the Bond record, any prizes won and any payments for cashed in Bonds.
3. Gift from income
One of the most valuable exemptions from Inheritance Tax is the ‘gift from income’ exemption. This allows gifts that are made from regular income to be deducted from the value of an estate.
Three conditions must be met for this exemption to apply:
- The gift came from the ‘normal expenditure’ of the donor – this means the expenditure of the donor based on their circumstances
- The gift was made from income
- The donor was left with enough income to maintain their standard of living.
For example, the income of a business owner might vary from one year to the next. HMRC’s starting point will be to see whether the individual had sufficient income in each tax year to cover the gifts that were made without affecting the person’s standard of living.
For this exemption to apply, gifts would normally need to be regular both in terms of frequency and value. Keeping good records is critical to claiming this exemption, as an individual must prove to HMRC that the gits met the conditions above.
The IHT 403 form contains a table which should be updated each year to show an individual’s net income and net expenditure, demonstrating that there was surplus income and that it did not affect the standard of living.
Get in touch
If you’re thinking of making financial gifts to your family this Christmas, we can give you the advice you need. Contact us by email at firstname.lastname@example.org or call us on 01189 876655.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.