Financial gifts can make a huge difference for children and grandchildren, but it is essential to make sure they are tax-efficient from an IHT perspective.

This Christmas, some of the best ways to give financially include gifting from surplus income, Junior ISAs and bare trusts. You could also make use of annual exemptions, small gift exemptions and charitable giving.

There is no IHT due on the first £325,000 of an estate but that rises to £500,000 if a property is being left to children or grandchildren for estates under £2m. Married couples and civil partners can leave up to £1m tax-free on the second death, assuming no exemption was used on the first death.

Gifting to children or grandchildren could be a tax-efficient way to help to improve their financial security, help them pay university tuition fees, pay off student loans or even get them on the property ladder.

You can gift money from spare cash, invest in a Junior ISA or a trust for younger relatives if you are scratching your head wondering what to get your loved ones for Christmas this year.

Gifting needs to be carefully planned, calculating how much is affordable to gift and structuring investment portfolios in the most tax efficient way.

Here are some handy tips to plan your gifting, considering any potential tax liability. People are often concerned about the “7-year rule” whereby gifts that are potentially exempt transfers (PETs) drop out of your estate after 7 years, but certain gifts are not even treated as PETs meaning there is no time limit.

To qualify for gifting from surplus income, money must come from income rather than capital, form part of a regular pattern and not affect everyday standards of living. This provision is very useful for people with significant pension income as well as those with rental and investment income.

It is important to record the first gift and make clear that it is part of a series of gifts as that ensures it is immediately outside the estate. Keep the paperwork as HMRC requests this information as part of the IHT reporting.

Junior ISAs need to be set up by parents or legal guardians but once they are set up anyone can contribute. Contributions in any tax year should not exceed £9,000. There are no investment limits for bare trusts and the money can be used by grandchildren at any time for any purpose. Money is taxed as if it is held by a child and regular contributions by grandparents from surplus income are exempt from IHT.

The annual exemption allows £3,000 to be given away a year without being added to the value of an estate and can be carried forward for a year meaning individuals can give £6,000 and couples £12,000 if they have not used the exemption previously.

The small gift exemption is £250 with no limit on the number of people it can be given to.

Each tax year, you can give a tax-free gift to someone who is getting married or starting a civil partnership. You can give up to:

  • £5,000 to a child
  • £2,500 to a grandchild or great-grandchild
  • £1,000 to any other person

If you are giving gifts to the same person, you can combine a wedding gift allowance with any other allowance, except for the small gift allowance.

For example, you can give your child a wedding gift of £5,000 as well as £3,000 using your annual exemption in the same tax year.

Gifts to charities are exempt from being treated as a PET. Leaving 10% of your net estate to charity will reduce the IHT rate to 36% from 40% under charitable giving rules.

The latest IHT figures for April to August this year showed £3.2bn was collected with a record £795m paid in June this year.

IHT receipts are expected to keep climbing and are forecast to reach £8.4bn by the 2027/28 tax year due to a combination of rising wealth and a freeze in the basic IHT threshold at the 2009/10 level until 2027/28.

If you would like further information about any of the issues in this article please call 020 3915 8585 or email us.