Planning to give a cash gift to a loved one this Christmas? Your generosity may have tax implications.
In this article, we’re going to explain everything you need to know about tax-efficient gifts over the festive season. Keep on reading for all the details or click on a link to head straight to a section…
- Are Christmas gifts taxable?
- Christmas gift tax allowances
- Tax-free gifts: 5 exemptions
- What is classed as a gift?
Christmas gifts, including cash gifts, may be taxable. That’s because if you give cash away during your lifetime it may count towards your estate for Inheritance Tax purposes.
However, any gifts you give to others will only count towards your estate if you die within 7 years AND you’ve more than £325,000 in assets (including property, savings, bonds etc).
If you’ve less than £325,000 in assets, or you don’t die within 7 years, then you shouldn’t have to worry about your loved ones paying tax on any money you give them this Christmas.
INHERITANCE tax threshold warning
Do be aware that the Government reserves the power to meddle with the current Inheritance Tax threshold. As a result, there’s a chance it will become less generous in future.
For the purposes of this article, we’ll naively assume things will say the same – but it’s something to bear in mind!
Even if you have more than £325,000 in assets and you pass away before the year 2030, cash given away during your lifetime may still be free of Inheritance Tax.
This is thanks to two generous allowances that apply to gift giving. Let’s explore these allowances:
1. The £3,000 annual allowance
Each tax year you can give away up to £3,000 to family or friends without any tax implications. In other words, a gift up to this amount won’t count towards your estate for Inheritance Tax purposes.
If you don’t use the full £3,000 allowance in a single tax year, then you can carry it forward to the next year. However, you can only carry forward this allowance once.
2. The £250 ALLOWANCE on individual gifts
In addition to the £3,000 annual allowance, you can also hand out up to £250 every year to as many people as you like. These gifts won’t impact the value of your estate, and they also don’t count towards your £3,000 annual allowance.
For most, this £250 single allowance will probably cover most Christmas cash gifts.
There is one important rule to be aware of though: If you’ve already gifted someone £3,000 in a tax year, then you can’t gift another £250 to the same person. That’s because you can’t use both the £3,000 and £250 allowance on the same person.
Alongside the £3,000 and £250 tax-free allowances, there are 5 other exemptions that apply to tax on gifts for Inheritance Tax purposes. Let’s take a closer look:
1. Gifts to a spouse or civil partner
If you’re married or in a civil partnership, gifts between your spouse or civil partner – for Christmas or otherwise – are completely free from inheritance tax. This is a big benefit of tying the knot!
2. Wedding Gifts
If a loved one is about to get married, then you can give them a cash gift without worrying about them having to pay Inheritance Tax on it.
However there are limits that apply. Parents can give up to £5,000, grandparents can give up to £2,500, while others can give up to £1,000 each.
These gifts don’t have to be given on a day of a wedding or civil partnership. They can also be gifted shortly before the big day.
3. Gifts to CHARITIES & political parties
If you want to gift money to a charity or political party, then you can do so without having to worry about tax. Just ensure that the charity or political party you are donating to is officially registered.
4. gifting money STRAIGHT from your income
If you have an income, it’s possible to give some of it away on a regular basis without it being liable for Inheritance Tax.
Your ‘income’ may include earnings from a job or a pension. The only rule that applies is that any money you give away doesn’t affect your lifestyle.
5. money for university costs
If you’ve children then you can contribute to their university tuition fees and living costs. There isn’t any limit as to how much you can give, as long as your children remain in full-time education or training.
Keen to learn more about these allowances? Take a look at our Inheritance Tax article, which details current IHT rates.
If you’re planning to give cash this Christmas, then you’ll probably find the above allowances more than adequate.
However, if you do give cash to others over the festive period, it’s worth knowing that it has to be a ‘gift without reservation.’ This means you can’t expect anything in return for it.
If this isn’t the case, then the above allowances won’t apply!
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice.
*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.