“The manner of giving is worth more than the gift.”
Pierre Corneille (1606 – 1684)
There are some occasions in the year where our thoughts naturally turn to present buying and what we can give our loved ones. Effective use of gift allowances and reliefs can represent a generous gesture to your family, whilst potentially reducing the liability to future taxation on your estate.
As a parent I recently read an article which focussed on the various views of parents and grandparents when it comes to limiting the amount given at Christmas to children and grandchildren. This particular article discussed the merits and drawbacks of limiting gifts to four specific gifts and it got me thinking about four reliefs and exemptions for estate planning that enable “exempt” gifts to be made whatever the time of year. The appeal with making exempt gifts is that they fall immediately outside the donor’s estate for Inheritance Tax (IHT) purposes and as such the usual seven year waiting period does not apply.
I want to focus on Number 4 as I feel it potentially has the largest benefit and is often under used.
Under current gifts out of income rules, a gift will benefit if, or to the extent that, 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 necessary mean monthly or quarterly but I would suggest at least annually
- 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.
- After allowing for all transfers of value forming part of one’s normal expenditure, the transferor is left with sufficient income to maintain a normal lifestyle (please see Norman’s example below)
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 uses of this exemption could be:
- 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.
In addition to regular gifts out of normal expenditure you can also make exempt maintenance payments to:
- your wife, husband, civil partner.
- your ex-spouse or former civil partner.
- relatives who are dependent on you because of old age or infirmity.
- your children, including adopted children, step-children, who are under 18 or in full-time education.
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 contact us for an initial discussion or speak with your Courtiers Adviser.
Please note that tax treatment depends on individual circumstances and may be subject to change in the future.
Happy gift giving!
Graeme Clark BA (Hons), APFS, IMC
Head of Private Clients
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