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THE FINANCIAL GIFT THAT WILL KEEP ON GIVING
9th December 2024
5 minute read

Fancy slipping a little monetary something into a loved one’s stocking this holiday season? Stop right there! However well-intentioned the gesture, there are plenty of factors you should consider beforehand to make sure you’re giving in a tax-efficient way that will help you as well as them.

Below are 10 essential tips to ensure effective gifting with maximum financial benefits all round.

1. UNDERSTAND TAX-EFFICIENCY

The annual tax-free inheritance tax exemption allows you to give away your money ahead of your death, reducing the overall value of your estate. The exemption is currently £3000 – that applies to you and the total gifts you give, not per person. You can give £6000 on behalf of your spouse by using their tax allowance – which means they can’t give money. If you don’t use the full £3,000 exemption in one tax year, you can carry it forward to the next year,
but only for one year.

2. YOU CAN GIVE UP TO £250 TO AS MANY INDIVIDUALS AS YOU LIKE IN A TAX YEAR

This is exempt from IHT, provided the recipient doesn’t also benefit from any part of your £3,000 annual exemption. But you can’t combine this with the £3,000 exemption for the same individual. For example, if you give £3,250 to someone, the £250 won’t qualify for the small gifts exemption—it all falls under the £3,000 exemption.

3. CONSIDER THE IMPACT OF INHERITANCE TAX (IHT)

Inheritance tax is charged on estates above a certain value – currently £325,000. Gifting within the exemption band detailed above can help reduce the value of an estate, potentially reducing the IHT liability. However, large gifts made within seven years of death could still be subject to IHT, which is why careful planning is essential. This rule is critical when planning significant gifts, as the timing can significantly impact the tax outcome.

4. USE TRUSTS TO PROTECT ASSETS

Trusts are a popular tool for wealth protection and tax planning. By gifting assets into a Trust, individuals can ensure that wealth is passed on according to their wishes while potentially avoiding immediate tax implications. Trusts can also provide protection from creditors and help manage how assets are distributed over time. However they can be complex to set up and run, and you should always consult a financial advisor and a lawyer when setting one up.

5. FORECAST CASH FLOW NEEDS

Don’t leave yourself short! Before making significant gifts double check to assess your cash flow and ensure you will maintain your financial security. Regular gifting can be beneficial, but it should not jeopardize the giver’s lifestyle or long-term financial goals.

6. WEDDING ALLOWANCE

Gifts made to family members in connection with a wedding or civil partnership are exempt from IHT, up to a certain limit. Parents can gift up to £5,000, while grandparents can gift up to £2,500, and others up to £1,000.

7. REGULAR GIFTS FROM INCOME

Gifts made regularly out of income are exempt from IHT, provided they do not affect the giver’s standard of living. These gifts must be made from income rather than capital, and it’s important to maintain clear records.

8. CONSIDER CAPITAL GAINS TAX (CGT)

When gifting assets such as shares or property, the giver may be liable for capital gains tax. If the asset has appreciated in value, this could lead to CGT on the gain. One strategy to reduce this is to gift assets that have lost value, as this can offset gains elsewhere in the portfolio.

9. LIFETIME ISAS (LISAS) & JUNIOR ISAS (JISAS)

LISAs and JISAs also offer opportunities for tax-efficient gifting, particularly for long-term planning. Contributions to these accounts can grow tax-free and be withdrawn without penalty under specific conditions.

10. NAME LOVED ONES IN YOUR PENSION OR LIFE INSURANCE

Make sure all this paperwork is up to date. However, keep in mind that children under the age of 18 will need a guardian to manage their money until they come of age.

With so many options, the key is good financial advice. Give yourself the gift of an appointment with your trusted advisor this festive season to ensure you preserve your wealth and minimise future liabilities as well as enjoy the joy of giving!

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