Christmas is the season of giving and for many people also a moment to think about financial generosity.
There are clear rules around inheritance tax (IHT) and gifting that shape how much you can give away during your lifetime without creating an unexpected tax bill for the beneficiaries of your estate.
Understanding these rules can help ensure that festive financial generosity is a joy not a burden.
You can make certain gifts each tax year that fall outside the scope of IHT entirely. The most straightforward is the annual exemption which allows you to give up to £3,000 in total each year.
If you did not use last year’s exemption you can carry it forward once which means a potential £6,000 gift wrapped neatly within the rules.
There is also an allowance for small gifts of up to £250 per person each year provided the recipient has not benefited from your annual exemption.
Some gifts are exempt due to the nature of the relationship. Wedding gifts fall into this category with limits up to £5,000 depending on whether the recipient is your child, grandchild or someone else.
Regular gifts from surplus income are another possibility. These must be genuinely from income rather than capital and must not reduce your standard of living. When done correctly they fall entirely outside your estate.
This can make them an efficient way to support family members with ongoing costs such as school fees or savings for house deposits or other goals.
Larger or one-off gifts that do not fall into an exemption are known as potentially exempt transfers (PETs). You can notionally gift any amount you like, but the seven-year rule applies – you must live for seven years after the date of the gift for it to become exempt from IHT calculations.
If you die within that period some or all of the value may be pulled back into your estate with taper relief applying after year three. For those thinking about more significant generosity during the festive season this timing has clear potential ramifications.
Christmas often brings families together and is therefore a natural moment to reflect on your financial legacy and support for family. But these rules can be tricky and are easy to get wrong – either in terms of timing, intent, amount or all of the above.
For anyone unsure how the inheritance tax gifting rules apply to their circumstances the sensible takeaway is to speak with a professional financial planner. A planner can help to ensure that festive generosity is possible without worries about tax liabilities.