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Bright Futures: A time for gifting

| Tax | Pensions | By Joshua Collis

In years gone by, I’ve slaved over the perfect gift for my loved ones, agonising over the colours, the sizes, the price, will they love it? Will they use it? Nothing’s worse than spending all that time and effort in the crowded Christmas streets, only to see disappointment glaze over a loved one’s eyes with a meek thanks. It wasn’t what they wanted…

Trying to quickly understand the latest fads in kids’ toys is a degree-worthy topic in itself. Many appear fun and exciting to begin with yet come Boxing Day, attention’s drawn to something else shiny and new (while the now-irritating sound of a somersaulting toy dog threatens the pleasure sought in that last sherry).

Appreciation and Gifting

There’s a magic to giving gifts which is almost sacred, yet in today’s financial environment the act of gifting to children and grandchildren is not deemed as sacred as it once was. Like a jealous sibling on Christmas Day, HM Revenue & Customs (HMRC) always wants a slice of the fun.

There are however some exemptions that can allow you to give now and more fundamentally, help younger family generations begin to appreciate and understand the importance and utility of money.

Here are a few ideas around gifting to the next generation where you can give now, free of Inheritance Tax (IHT) for their benefit later…

  1. The annual exemption
    Each tax year £3,000 can be given away by an individual. In addition, it is possible to carry forward any unused part of the £3,000 exemption to the following tax year. For a couple who have not made gifts in this or the previous tax year this could enable £12,000 to pass free of IHT now, with a further £6,000 from 6th April 2019.
  2. Exemption on small gifts
    In any tax year you may gift up to £250 per person to any number of individuals free of IHT.
  3. Gifts out of income
    If you have substantial income, whether derived from taxable savings & investments, earnings or pensions, you can make significant reductions to your potential IHT liability by making gifts out of income. Unlike most tax exemptions and reliefs, this exemption provides unlimited relief from IHT. As this relief is not subject to an upper limit, effectively the only limiting factor is your own personal circumstances.

I’d like to focus on gifts out of income, as I feel it potentially has the largest benefit out of these options and is often underutilised.

There are certain clauses (and not Santa Clauses) that gifts out of income must adhere to. Under current rules, a gift should be exempt from IHT if it complies with certain conditions as below:

  • The gift forms part of the normal expenditure of the transferor (i.e. payments in respect of the gift are regular or habitual). Regular or habitual doesn’t necessarily mean monthly or quarterly but I would suggest at least annually, so every Christmas would qualify..
  • Taking one year with another the gift is made out of income (not capital). It’s usually appropriate to make the gift from the current or bank account which receives your pension and or/earned income and savings income so it’s clear that such gifts have not been made from capital. However, please be aware that HMRC normally deems unspent income to be capital after two years.
  • After allowing for all gifted sums forming part of one’s normal expenditure, the transferor is left with sufficient income to maintain a normal lifestyle. ‘Normal’ is what is normal for you.

It is important that all three of these tests are satisfied separately and this will be dependent on each individual’s own personal circumstances.

Some potential ways in which you can wrap this gifting from income are;

  • Paying regular premiums to an investment or life assurance policy written in trust.
  • Paying a grandchild’s education fees.
  • Funding a child or grandchild’s ISA or Junior ISA (JISA).
  • Funding a child or grandchild’s pension
  • Helping a child or grandchild with their mortgage payments

As always, if there are any questions or if you’d like to speak in more detail about the gift allowances and the opportunities available based on individual circumstances, please speak with your Courtiers Adviser or contact us for an initial discussion.

Happy gift giving!

Best wishes,

Joshua Collis

Trainee Adviser

Please note that tax treatment depends on individual circumstances and may be subject to change in the future.

Warning – the views expressed by Courtiers in this summary and any video and video transcripts, are reached from our own research. Courtiers cannot accept responsibility for any decisions taken as a result of reading this document, watching the featured video or reading the video transcript and investors are recommended to take independent professional advice before effecting transactions. The price of stocks, shares and funds, and the income from them, may fall as well as rise. Past performance is not necessarily a guide to future returns.

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