Christmas is a time for gifts!
Dec 07, 2018
It’s that time of year again! We all think about buying presents at Christmas, but what if you’re planning to give gifts of money? If you’re thinking about gifting cash at Christmas then it’s worth bearing in mind that there are various inheritance tax (IHT) exemptions and reliefs available, which you should take advantage of. There are also important things to consider if you’re planning to make gifts to employees or to charity.
Gifts from the IHT annual exemption
The IHT annual exemption is £3,000 per donor per annum. If it’s not used by 5 April you lose it, although it is possible to carry the allowance forward one year if unused. This means that if you didn’t use your annual allowance for 2017/18, then you can make gifts of up to £6,000 in 2018/19.
If any gifts you make to individuals exceed the annual exemption, then there may still be no inheritance tax to pay – but only if you survive for 7 years following the gift or your gift falls within the £325,000 nil rate band.
Gifts out of income
A more generous inheritance tax exemption applies if you can prove that you’re not transferring capital, but you’re making gifts out of your regular income. As you’d expect, there are numerous detailed conditions attached to this exemption, as it requires records of income and expenditure to be kept in order to prove that you have sufficient surplus income each year to make regular gifts to your beneficiaries. If you’re interested in exploring this option, then we can of course help you in keeping the necessary records to satisfy HMRC.
Gifts with consequences
Although there’s no Capital Gains Tax (CGT) on gifts of cash, there may be CGT to pay if your gift comprises shares or other assets. This is because the transaction will generally be deemed to take place at the current market value, even though no money changes hands.
The amount of the gain is normally determined by comparing the market value of the asset being gifted against its original cost. If this amount is within the annual CGT allowance (currently £11,700) then there will be no CGT payable.
If the gift comprises shares in a trading company or other business assets, then it may be possible for the donor and recipient to sign an election – this means that the gain is held over, so that no CGT is payable by the donor at the time of making the gift. If you sign an election in this way, the individual receiving the asset will take over the donor’s original cost for subsequent disposal. Please do get in touch with us if you’re considering making gifts of shares or other assets – this is a complicated area and we can advise you fully of all the tax implications.
Gifts of up to £50 to employees
Back in April 2016 new rules were introduced to allow employers to provide their directors and employees with certain “trivial” Benefits in Kind tax free.
The new rules were brought in as a simplification measure, meaning that certain Benefits in Kind no longer need to be reported to HMRC – as well as having the added advantage of being tax free for the employee. There are of course a number of conditions that need to be satisfied in order for the exemption to apply:
- the cost of providing the benefit must not exceed £50
- the benefit must not be in cash or a cash voucher
- the employee must not entitled to the benefit as part of any contractual obligation, such as a salary sacrifice scheme
- the benefit must not be provided in recognition of particular services performed by the employee as part of their employment duties (or in anticipation of such services)
So this exemption will generally apply to small gifts to your staff at Christmas, on their birthday, or on other occasions and includes gifts of food, wine, or store vouchers.
Be aware that if your business is a ‘close’ company, and the benefit is offered to someone who is a director or other office holder of your company, then the exemption is capped at a total cost of £300 in the tax year. To clarify – a close company is a limited company with five or fewer ‘participators’ (i.e. shareholders), or a limited company in which all the participators are directors.
Gifts to charity
If you’re a higher rate taxpayer, then ideally you should make ‘Gift Aid’ payments to charity – this not only provides additional benefit to the charity but also allows you to obtain additional tax relief on the payment.
For example, if you make a £20 cash donation to a particular charity, the charity is then able to reclaim a further £5 from HMRC – making a gross gift of £25. If you’re a 40% higher rate taxpayer, then you can claim a further £5 tax relief under self-assessment – which reduces your net cost to £15.
In order to do this you must make a declaration that you are a UK taxpayer, and if you’ve not suffered sufficient UK tax to support the Gift Aid amount then you’ll be taxed on the shortfall.
Remember that Gift Aid doesn’t just apply to gifts of cash. Many charity shops will now sell your donated items on your behalf, and are able to treat the sale proceeds as Gift Aided donations. It’s also possible to gift quoted securities and land and buildings to charity, and claim Gift Aid on the market value of those assets.
Please feel free to contact us if you are considering taking advantage of any of these exemption and reliefs when making gifts over the Christmas period.