The festive season seems to approach with more speed each year so about now the more organised will be starting the search for ‘something different’ to give over the festive season. You may wish to keep things simple with a cash gift, or maybe now is the time to review your estate and make larger gifts to tidy up your affairs. If this is the case, there are a whole host of issues to be considered for the unwary. The one person to whom you do not wish to unknowingly give a Christmas present is Mr Tax Man.
I am often asked whether there are any tax issues from making gifts to family. For the donor, the person making the gift, the answer is no. The gift will be made out of income which has already suffered tax. The recipient, however, would need to declare the income generated by the gift if it is added to their savings. So for income tax purposes, in relation to small cash gifts, there’s generally nothing to worry about.
If you have reached a point in your life where you’re beginning to feel you need to tidy up your estate and would like to pass assets on to the next generation, care will be needed. Unfortunately, capital gains tax treats such gifts as disposals at market value. So, even if you have not received any cash for the asset, you could still find yourself facing a hefty tax bill if the assets you have chosen to give away have substantially increased in value.
It’s the giving, not the receiving, that matters at this time of year, or that’s what they say! So, if you are making a gift to charity, be sure to supplement this with a gift-aid form, which allows the charity to reclaim a further 25%. Non-taxpayers should take extra care and must not sign a gift aid form for their donation as, even though the taxman would still make the refund to the charity, he would then raise an assessment to reclaim this tax from them.
Inheritance tax - not something that immediately springs to mind when you start to plan your Christmas dinner. It is, however, another tax which needs some careful thought. Gifts to individuals remain in your estate for seven years after the gift has been made so a record of such gifts will be extremely helpful to your executors should the worst happen during that time.
There is an inheritance tax annual exemption of £3,000 for gifts to individuals which can be carried forward to the next tax year if unused. In addition, small gifts of up to £250 can be made to as many people as possible without affecting your estate. So if you have 10 grandchildren you could give them £250 each which will not only reduce your estate; it is also likely to earn you a lot of hugs on the big day!
All of this could leave you feeling as enthusiastic about making gifts to the family as the turkey curry that follows on Boxing Day. However, if you do not wish to be filling the Tax Man’s stocking this Christmas, careful thought really is a must.
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