Cost of giving: Tax considerations for gifting

Tax considerations for gifting

Modern-day Scrooges aside, the festive season is largely welcomed as a time of celebration. It’s our annual opportunity to eat, drink and be merry with family and friends.

Less welcome, perhaps, is the sobering reality that all this cheer comes at a cost. UK consumers are expected to have spent a staggering £22.7 billion over the festive period, with our outlay on gifts and celebrations rising from £416 per person in 2023 to £433 per person last year, driven partly by above-inflation price increases.

During the season of goodwill, gifts of money can make for a generous gesture from parents or grandparents, whether as a present, a direct investment in a loved-one’s financial future, or a helpful way of easing the economic strain amid ongoing cost-of-living pressures. But it’s worth noting that gifts can come with important financial implications at whatever time of year.

Tax on legacy giving

Typically, gifts made from regular income are exempt from tax. However, when it comes to passing on wealth and assets, tax obligations can apply depending on what is gifted and to whom, as well as the value of the gift and when it was given.

For Inheritance Tax (IHT) purposes, items counted as gifts include money, household and personal goods (such as jewellery, antiques, a house or land), stocks and shares listed on the London Stock Exchange, and unlisted shares held for less than two years before your death.

And if they are gifted less than seven years before the person giving them dies, the recipient could be liable to pay IHT on them.

If IHT does apply, the amount to be paid is governed by what’s known as the ‘seven-year rule’, with gifts made within three years of the donor’s death taxed at the standard 40% rate of IHT, and those made between three and seven years of death taxed on a sliding scale known as ‘taper relief’. This only applies if the total value of gifts in the seven years prior to death exceeds the £325,000 tax-free threshold.

Gifting exemptions

While living for seven years after making a gift ensures it will be tax-free (unless it is part of a trust), there are other circumstances where gifting will not incur a tax burden.

Gifts made to legally recognised spouses or civil partners, for example, are exempt from IHT – as long as the recipient permanently lives in the UK. Furthermore, the ‘annual exemption’ allows you to give away up to £3,000 worth of gifts every tax year without them being added to the value of your estate, with an unused annual exemption carried forward to the next tax year (for one tax year only).

Another consideration is the small gift allowance. This provides the means to gift up to £250 to an individual each tax year (as long as another allowance has not been used on the same person).

Complex implications

The value of policies such as this is clear, and experienced individuals might well have seen the impact that the death or serious illness of a key person can have on a business. Despite this, however, an estimated 37% of businesses do not have such cover in place.Moreover, in the turbulent conditions of recent years, there are concerns that companies are cutting back on insurances as a result. Research has shown that 86% of SMEs who are considering cancelling a policy or switching provider said the decision was driven at least in part by the financially challenging conditions caused by the cost-of-living crisis.And in its Risk Insights Report, insurer Aviva estimates that as many as half of UK businesses are underinsured.All the while it is business as usual, this might be an understandable position to adopt. But in truth, there is no escaping the risks, both visible and hidden, that can impact on your business at any given time.While you might not always be able to control them, you can define them, understand them, and protect yourself against them, establishing a level of resilience to underpin future growth.

The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Wealth Management or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.