Christmas is a time for generosity, but most of us feel we are quite generous enough to the taxman during the rest of the year.
At Continuum we are looking at ways he might be getting on our Christmas list – and at ways to keep him off.
Your personal gift giving
It is easy to get confused about gift giving and tax, thanks to the complexity of tax rules.
You can give away as much money as you want to your children, and grandchildren whenever you want, and you don’t have to tell anyone about it. However, it is worth noting that if the transferor fails to live for 7 years you will need to notify HMRC.
So, if you want to give them a big cash sum, or a car, or anything else this Christmas, there is nothing to stop you.
The potential difficulty is with inheritance tax. If your estate is worth more than £325,000, there could be inheritance tax to pay, at a rate of 40%. But this threshold can be increased to £650,000 if your spouse left everything to you, because transfers between spouses are exempt, and you would inherit their allowance. There is also another exemption for the value of a family home called the residence nil rate band, currently set at £175,000. The personal representative would however, need to claim the Nil Rate Band (or unused proportion) and the Residence Nil Rate Band from HMRC as these would not be inherited automatically.
If you were to die within seven years of giving a large gift, the value of what you gave would be counted as part of your estate. Survive for more than seven years and the gifts cannot be counted by the taxman or made subject to tax at all.
Worried about inheritance tax?
There are ways to reduce the impact of IHT on those you leave behind. To find out what they could mean for your loved ones, call us now for a free initial consultation
Even if your estate is worth more than the inheritance tax limit, you can make certain gifts free of tax. You can make any number of gifts of any amount out of your normal income. Gifts from income (not capital) can be exempt, providing they are made regularly as part of normal expenditure, do not affect your normal standard of living and adequate records of these gifts are maintained . If you are digging into your capital, then you can make a gift of £3,000 per year. This allowance can be carried over for one tax year, so if you didn’t make a gift in the last tax year, you can still use it this tax year as well as this year’s allowance.
You can make any number of small gifts under £250 each. These cannot be combined with the £3,000 annual exemption to make a larger exempt gift to one person.
Setting up investments for children is a popular way to provide a Christmas gift that lasts. Parents are liable for tax if the return on that investment exceeds their tax-free personal savings allowance of £1,000 a year – or £500 for higher rate taxpayers. However, there is no tax to pay if the money is given by a grandparent.
Both parents and grandparents can also invest tax free on behalf of a child by paying up to £9,000 into a Junior ISA, although it must be opened by a parent or guardian.
As an employer providing gifts to your employees, you have certain tax, National Insurance and reporting obligations.
A Christmas bonus will be taxed, but if you give a gift, the rules are not so clear. Depending on the value of the gift, the employee may still get taxed on the value of the gift as a benefit in kind, and you may have to pay Class 1A NI.
The Taxman does consider some small items to be trivial benefits which can be given as tax-free gifts to staff. These can include seasonal gifts such as a turkey, a bottle of wine, or a box of chocolates.
If you are feeling extra generous this Christmas and intend to give larger gifts to your staff, then you can pay the tax and NI due on the cost of the gift, on behalf of the employee, through a PSA (PAYE Settlement Agreement) with the tax office.
If you run a business, there are different rules depending on the type of gift you give. You can find the regulations here.
If you’re self-employed, you don’t have to report or pay tax or National Insurance on personal gifts (including Christmas presents) that you give to employees.
Want to pay less tax?
Cutting your tax bill means increasing your income. Find out how you can save tax by calling us at Continuum
We all want to pay less tax not just at Christmas, but all year round. The good news is that it is usually possible to reduce your tax liabilities with some expert help. At Continuum we provide that help with all financial matters including tax reduction.
To see what we can do for you this Christmas for all the rest of the year round, simply contact us.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
Taxation and trust advice is not regulated by the Financial Conduct Authority.