All I want for Christmas is a gift... without a tax bill

04 December 2019

With Christmas period fast approaching, many shops are offering enticing deals for those buying last minute gifts. But there are some gifts out there which can come with an unwanted extra – a potential tax bill. Gary Smith, chartered financial planner at leading advice firm Tilney, looks at the rules surrounding gifting and what the tax implications are.

Smith explains: “Each year, many people give monetary gifts to organisations, spouses and loved ones. While this is obviously a generous thing to do, you must be aware of potential tax implications before you do. Many of these gifts will fall within the HMRC’s allowable limits, but there may be some that could inadvertently cause tax issues for both the giver and the recipient."

What are the rules upon gifts?

“Gifts up to any value amongst (UK Domiciled) spouses and civil partners are free from tax," explains Smith. "Gifts for the National Benefit, such as gifts to museums, libraries, National Trust etc. are all free from tax too. Gifts to Charity of any value are also free from tax and may even qualify you for an element of tax relief."

“However, you’ll note that gifts to individuals do not fall within the above remits and therefore all such gifts are potentially taxable unless they meet the following conditions:

  • Total gifts made by you in a tax year are less than £3,000, which is the annual gifting exemption. However, you can also carry forward any unused £3,000 allowance from the previous tax-year, making gifts of up £6,000 possible in some cases.
  • Small gifts of up to £250 can be made to any number of people in the tax year, provided the total to any one person does not exceed £250. If it does, this exemption does not apply and all gifts would start to use up the afore-mentioned £3,000 allowance
  • Gifts out of regular excess income, that are part of normal ongoing expenditure and don't effect your lifestyle are also permitted
  • Gifts can also be made tax free in respect of a marriage or civil partnership amounting to £5,000 from each parent, £2,500 from each grandparent and up to £1,000 from any other person. These would not use up any of the other allowances and need to be made on or shorlty before the ceremony

“In most cases, a financial gift to a child, such as a contribution to a Junior ISA, should have no adverse tax implications. Parents or grandparents, should also be aware of the ability to fund a pension for their children. This way, the child gets tax relief, so if the maximum allowed contribution is made £2,880 turns into £3,600 with the £720 tax relief. The fact that the investment will get compound returns over many years will give a child a great start to their retirement planning, though they probably won't be too excited about being handed a pension subscription statement on Chrismas day. Of course the downside to this is that they can’t access their pensoin until much later in life.

What happens if you breach any of these limits?

“Any gift that is not exempt under these allowances, is potentially taxable following the death of the donor. On the one hand the good news is that there is no tax due on the donor of the gift during their lifetime. Tax would only be payable if the donor died within a period of seven years from the date of the gift and can be up to 40% of the value of the gift made. The recipient will be liable for this, even though they have no control over the situation whatsoever. Indeed they may have spent the gift. Whether the charge becomes due will depend upon the donor’s other lifetime gifts before death and available ‘Inheritance Tax Nil Rate Band’ – that is, the amount up to which an individual can leave as a legacy before a tax charge becomes due. The current Nil Rate Band is £325,000.

“One thing most won’t be aware of is that if the donor dies within seven years of the gift, but the value of the gift falls within the deceased’s Inheritance Tax Nil Rate Band (resulting in no tax for the recipient) it could transpire that another beneficiary of the deceased’s estate could end up effectively paying the tax for it!

“In the main, the only time a donor will be subject to tax upon a gift during their lifetime would be if they:

  • Gifted something but continued to receive a benefit from it (such as a house and continued to reside in it); or
  • Made a gift to a discretionary trust, over the donor’s available Inheritance Tax nil rate band

“Both of the above can be quite complicated and therefore specialist tax advice must be sought if you feel you are subject to either.

“So, many people will not know that making a simple gift of finaincal value could give rise to a tax charge for the donor, the person receiving the gift and perhaps even someone else completely! Ultimately making gifts of significant note falls within estate planning which is a very complex area and where is is wise to seek professional financial advice.”

About Tilney

Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years.  Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.

We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.

Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.