According to the Bank of England, a typical household in the UK spends over £2,000 each month, but in the run up to Christmas, habits change dramatically and spending increases by 25%. Much of that additional spend will undoubtedly be on food and alcohol, but a large proportion will be in gifts.
Not many of us will be giving presents away with one hand and, with the other, updating our lifetime gifts spreadsheet, but this time of year is always a good time for a brief refresher of the Inheritance Tax rules in relation to lifetime gifts.
For Inheritance Tax purposes, a gift can fall into one of three categories; those that are exempt, those that are potentially exempt and those that are chargeable.
Small gifts (an unlimited number of gifts of up to £250 made to different people in a particular tax year) and regular gifts made out of excess income (such as Christmas or birthday presents) can be exempt transfers for Inheritance Tax.
Gifts can also be exempt because of the status of the recipient; there is usually no tax to pay on gifts between spouses and civil partners (as long as both live in the UK permanently) and gifts to charities, political parties and gifts for national purposes are also exempt.
For all those new year engagements, it should be borne in mind that gifts made to someone in anticipation of their wedding or civil partnership are exempt up to set limits depending on the relationship between the donor and the couple; parents can give £5,000, grandparents £2,500 and others £1,000 (all per person).
The other main exemption which will cover the average Christmas spend is the annual exemption of £3,000 per year.
Potentially exempt transfers (PETs)
Those gifts that are not exempt as exempt transfers will, in the main, be PETs meaning that there will be no immediate charge to Inheritance Tax on the making of the gift and, if the donor survives the gift by seven years, the gift will be exempt. PETs that become chargeable due to the donor dying within seven years of the date of the gift will be brought back into account on death.
Lifetime gifts that do not qualify as PETs are known as chargeable lifetime transfers (CLTs). The most common type of CLT is a gift into trust. A CLT in excess of the available nil rate band will be taxed immediately to 20%.
In addition to the above exemptions, business property relief and agricultural property relief may reduce the amount of any gift chargeable to Inheritance Tax by 100% or 50% and for any gifts that fall within a donee’s nil rate band, the rate of Inheritance Tax applicable will be 0%.