Larger Christmas gifts could attract the attention of the taxman.
With less than a month to go to Christmas, you are probably more concerned with finding the perfect gift for your nearest and dearest (so long as it's in the three for two offer) than in contemplating whether you need to be contemplating some Yuletide tax liabilities.
Unfortunately I am not pulling your Christmas cracker. Strictly speaking, any gift that causes a fall in value of a person's estate could give rise to an inheritance tax (IHT) charge. At Christmas, to find the fall in value, check the size of the dent(s) in your wallet.
But there is light at the top of the Christmas tree. Most gifts to individuals (i.e. those aforementioned rellies) will be covered by one of the various exemptions or reliefs described below, or will be considered a Potentially Exempt Transfer (PET) for IHT purposes.
PETs, which would normally cover outright gifts between individuals such a Christmas pressies, will become exempt from IHT if the donor survives seven years or more from the date of the gift. Conversely, if the donor does not survive seven years, IHT may become due although it may not be the gift recipient who ends up paying it.
Remember, PETs are for life, not just for Christmas.
Of course, if your gift falls within one of the various exemptions in the IHT selection box, you needn't worry.
Small Gifts Exemption
Smaller presents like the aftershave and socks that you have bought for Uncle Terry are unlikely to be caught by the IHT regime. Each person can make gifts of up to £250 per tax year, per person without any impact on IHT. Note that this is an exemption, not a relief. If the combined value of all the gifts to a single individual exceed £250 in any given tax year, all of the gifts will be PETs (unless covered by another exemption or relief), not just the excess over £250.
Note that smaller gifts like diamond earrings may not be considered small gifts.
Annual Exemption
Each tax year you can give away up to £3,000 in total to anyone you like without paying IHT. If you are feeling particularly stingy one year (maybe you own some bank shares?) you can carry forward any unused part of the £3,000 exemption to the following year, but no further.
Transfers between spouses
You can always give your spouse or civil partner a brand new Porsche, or a Tiffany diamond pendant without creating a PET. This is because transfers or gifts between spouses are exempt, except where the donor is UK domiciled and their spouse is non-UK domiciled, in which case the lifetime exemption limit is £55,000.
Let's hope Mr Thewlis is reading.
Regular gifts out of income
Any gifts made out of your net income may be exempt from IHT if they are part of your regular expenditure which could include habitual annual gifts given at Christmas. Grandparents, ancient maiden aunts and other relatives often give all the grandchildren/nieces and nephews/street urchins the same cash amount at Christmas, and these kinds of things would normally be included. Not sure I need to worry too much about my annual £5 book tokens though.
As ever with all things tax, it is always a good idea to keep a record of these gifts to show that they are regular and that you can make them without needing to draw on your capital.
Other exemptions
If you can't face the hustle and bustle of the shops this Christmas, something gaining in popularity over the past few years is the concept of charity gifts. These days you can buy goats, school books or even toilets as a gift, while helping fund charity work. Donations to charity are exempt from IHT, as are gifts of heritage property and gifts to political parties, just in case you suspect Gordon might be on his uppers next year...
As we are still, officially, in a recession, it is perhaps unlikely that most of our stocking fillers will end of being charged IHT. Nevertheless, for the more extravagant among us, there may be a potential issue to address. And if there are any extravagant readers, I will gladly sort out any IHT on any huge cash gifts into my bank account…
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