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As Christmas approaches at speed, the financial headwinds facing younger generations seem particularly harsh. Debts from university are greater, homes less affordable and company pensions less generous and reliable than they were for older generations. Now the soaring cost of living and rising borrowing costs are further aggravations.
Anecdotally, we are seeing some older savers consider financial gifts to support younger family members this year, which might be an attractive option to those stressed by the thought of Christmas shopping. But what are the potential pitfalls, and benefits, of gifting cash or assets — not least in terms of tax?
There is no automatic exemption for festive gifting but most cash gifts tend to be covered by one of the inheritance tax exemptions — even though these have not changed since the early 1980s. The £250 per person limit would now be worth about £1,150 had it risen with inflation, while the £3,000 annual total gifting exemption would be in excess of £13,500.
Such amounts can go a little way to mitigating the IHT liability on smaller estates, an imperative being felt by a growing number of families as the nil rate band (or tax-exempt allowance) of £325,000 has been frozen for 14 years, and will remain so until 2028, alongside the £175,000 residential NRB.
But what of more substantial gifts?
These can be made by people with more income than they need, under the so-called “normal expenditure from income” exemption. To qualify, the gifts must be regularly made. They must come from income rather than capital and cannot affect the donor’s current standard of living. This will not help if you only intend to make a one-off gift, but for those who are accumulating savings from excess income, gifting some each Christmas can be a tax-efficient way of helping younger family members.
If your gift is not covered by an exemption, then all is not lost. Roy Jenkins, the former Labour chancellor, described IHT as “a largely voluntary levy, paid by those who distrust their heirs more than they dislike the Inland Revenue”. After all, you can give away as much of your wealth as you like, and provided there is no continued benefit to you, the value will leave your estate after seven years.
Jenkins’ point was that many people want to retain access to some or most of their wealth — not least in case emergency or late-life expenses, like care home fees, arise. They fear their relatives will spend the money unwisely, or render it inaccessible.
This issue can be addressed by using trusts — and two types are of particular interest.
A discretionary trust can allay some concerns that a beneficiary might squander assets, or lose them through divorce or a business insolvency — or simply to limit access until a child is of age. The beneficiary will be listed as one of several possible beneficiaries and will only benefit at the trustees’ discretion, so the trust can protect the assets, and the timing and size of any payments made from the trust can be controlled. Each person can gift up to the £325,000 nil rate band into discretionary trusts in any seven-year period without triggering an IHT liability.
Gifts exceeding this will be immediately liable to IHT at 20 per cent with further tax due if they die within seven years.
A bare trust can also be useful, particularly where grandparents wish to invest for grandchildren. When investing for minor beneficiaries, the natural instinct is to use tax-beneficial wrappers such as a Junior Isa (Jisa), but these are limited in size and can’t be accessed before age 18, even for the child’s benefit.
If a grandparent invests for a grandchild using a bare trust, the invested amount is unlimited and money from the trust can be used for the child’s benefit before 18 if required. The investments are taxable, but it is the minor beneficiary who is liable, and their personal income tax and capital gains tax allowances usually eliminate any liability.
While bare trusts can be as tax efficient as a Jisa but less limiting, anti-avoidance legislation does exist where the money is provided by a parent rather than a grandparent. If the income exceeds £100 the income is taxable against the parent. The Jisa has a slight tax advantage for parental investments as they are not caught by these measures.
One benefit of using Christmas to make significant gifts, rather than birthdays, for example, is that if you are gifting to multiple beneficiaries, they all happen on the same day.
When parents make a substantial gift to one sibling, they will often make a similar gift to the other shortly after, in order to “treat them equally”. However, if the total of the gifts exceeds the nil rate band, then the sibling receiving the later gift will have an IHT liability on their gift that the other won’t. This is because the earlier gift may be covered by the unused nil rate band, so the estate pays the tax on the gift if the donor dies. However, once the nil rate band has been used the recipient of any excess gifts becomes liable for any tax due.
So gifting in the fairest and most efficient way can reward the giver as well as the lucky recipient — at Christmas and beyond.
The author is head of estate planning at wealth manager Evelyn Partners
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