20 December 2019

As we approach the festive season, giving and what to buy for family and friends is uppermost in our minds.  Planning that special gift and picturing the recipient’s face light up with delight is all part of the fun - well, for some of us it is.  However, are there other benefits to being more generous this year and in future years?

Over the years, many clients have advised that their strict saving and limited spending habits are engrained and they attribute that mind-set to the high credit balance in their “rainy day fund”. 

The level of that fund varies from client to client and I have often found myself having to encourage individuals to change these spending habits as part of their tax planning and wealth management. Experience has shown me that, where clients don’t change their habits, many a rainy day fund can be used to meet care costs and/or Inheritance Tax liability.  Yes, we need to retain sufficient funds to maintain our standard of living, but are we retaining too much?

So, whether it is a one off gift, a structure for passing wealth to the next generation, or gifts out of surplus income, let me answer a few questions you (or your loved ones) may have on gifting. 

Q.    When is the ideal time to make a gift?

A.   There is no ideal time as it depends on your circumstances, what you want to gift and to whom. However, a gift “stays on the slate” for Inheritance Tax purposes for 7 years, unless it is an exempt gift.

Q.    What is an exempt gift?

A.   Each of us can give away £3,000 each tax year and this is known as the “annual exemption”. In addition to this, small gifts (£250), wedding gifts (£1,000 per person, £2,500 for grandchild or £5,000 for a child), gifts out of surplus income, or gifts to charities/political parties are exempt.  Also, gifts between spouses and civil partners are IHT neutral. 

Q.    Who should I gift to?

A.   Who are your ultimate beneficiaries in terms of your Will? Treat that as your starting point. Consider whether a gift to them now would benefit you (from an IHT and asset accumulation point of view) and them.  Is it not better that they thank you in person during your lifetime? That way, you can see them flourish with the stain of mortgage payments lifted, or you might even accompany them on that world cruise!

Q.   Is there a way I can gift but still retain an element of control?

A.   Gifts can either be outright or in trust.  Trusts are often used as a way of ensuring young or vulnerable beneficiaries are protected from themselves and others.  When reviewing your plans, we can discuss the options to enable you to decide on the best route. 

Q.  Is Inheritance Tax the only tax I need to consider? 

A.   No, if the gifts are anything other than cash, we need to review the Capital Gains Tax position.  In certain circumstances, Pre-Owned Asset Tax may also be applicable.  Following a review of your assets and your gifting objectives, we can prepare a proposal setting out the ideal order and timing of gifts to ensure tax efficiency. 

As part of a review of your affairs in 2020, sign up for our update session on Wills and Powers of Attorney: click here.

For more information, please contact a member of our Wills, Estates & Succession Planning team.