Gifts on Christmas

Inheritance Tax on Gifts for Christmas

Are you thinking of giving Christmas gifts to your loved ones? With Christmas less than a week away, you may now be panicking about what to give your loved ones. Rather than join the chaos of the last-minute Christmas shoppers, you might consider giving a cash gift this Christmas. Because there is an inheritance tax on gifts.

Beware of Triggering Inheritance Tax on Gifts

When deciding what to give as Christmas gifts, the possibility of triggering an unintended inheritance tax liability isn’t one that comes to mind immediately. But there are traps that may catch the unwary. So here is some information that will help you out:

Income or Capital

When making a gift, it is important to find out whether the gift is being made out of income or from capital. There is an inheritance tax exemption for normal expenditures from income. To qualify, the gift must be made only from surplus income. It’s critical that you have enough revenue left after making the gift to sustain your lifestyle. To avoid unwanted questions, it is a good idea to set up a regular pattern of giving. Thus, keep records to show that the gifts were taken from income.

A gift taken from the capital will be differently taxed. For example, the proceeds from the sale of a property or the gift of a valuable antique will reduce the value of the estate. Unless the gift falls within the ambit of another exemption, it will be an exempt transfer (PET) and will be taken into account in working out the inheritance tax due on the estate if you die within seven years of making the gift.

Gifts to Spouses and Civil Partners

The inter-spouse exemption protects gifts between spouses and civil partners. Gifts of any value can be given to a spouse without worrying about the inheritance tax.

Annual Allowances for Gifts

Everyone has an annual allowance for inheritance tax purposes of £3,000. The annual allowance enables you to give away £3,000 every year in assets or cash. Besides, the gifts are covered by other exemptions without being added to the value of your estate.

You can also carry forward the annual exemption to the following year if it is not used. So, if you did not use it in the last tax year, you can make gifts of up to £6,000 this year without having to worry about inheritance tax. But any unused allowance is only looking forward to the following tax year, after which it is lost.

Small Gifts

The small gifts exemption enables you to make gifts of up to £250. Moreover, you can give a year to as many people as you like without having to keep a tally for inheritance tax purposes. The same person cannot enjoy a small gift of £250 besides the annual gift allowance.

Wedding Gifts

If a family wedding is on the horizon, you can take advantage of the wedding gift exemption to make further gifts. To qualify, the gifts must be made before the wedding, not afterwards. The exempt amounts are set at £5,000 for gifts to a child. Thus, £2,500 for gifts to a grandchild or great-grandchild and £1,000 for a gift to another relative.


Extra note: IHTA 1984, ss. 18 – 22.

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