…I have always thought of Christmas time, when it has come round… as a good time: a kind, forgiving, charitable, pleasant time: the only time I know of, in the long calendar of the year, when men and women seem by one consent to open their shut-up hearts freely, and to think of people below them as if they really were fellow-passengers to the grave, and not another race of creatures bound on other journeys. And therefore, uncle, though it has never put a scrap of gold or silver in my pocket, I believe that it has done me good, and will do me good; and I say, God bless it!
– Charles Dickens, A Christmas Carol
As Scrooge’s nephew says so well, Christmas is a time for generosity and for thinking of others, holding a unique position in many people’s calendar to move the focus away from ourselves to others. It is a time to slow down and turn our thoughts to giving to others and enjoying in each other’s company.
In less altruistic fashion, the government’s Autumn Budget brought unwelcome news for people concerned with passing wealth to their loved ones. The Chancellor announced that the threshold above which inheritance tax is paid will remain frozen until 2030; farmers and business owners face challenges arranging matters so that their enterprises remain intact on their death; pensions will be caught with the inheritance tax net from 2027; and both capital gains tax and stamp duty will increase in the meantime. Enough, one suspects, to make Scrooge blush.
Christmas is an excellent opportunity to consider how we might pass on our wealth and provide for future generations. Luckily, there are several ways to do so.
Small gifts to anyone
The first example of ways to pass on our wealth starts with small gifts of £250. We can give away £250 to as many people as we like, as long as we have not already given £250 to the same person in the same tax year.
Gifts for Christmas and birthdays
We can also give birthday or Christmas gifts to anyone of any value from our regular income, allowing us to give generously at this time of year. It is important to remember that gifts from our savings would not be exempt.
Gifts in anticipation of marriage
This time of year is often filled with parties, engagements and wedding plans. Fortunately, HMRC also has a romantic streak as we are allowed to give gifts to people in anticipation of marriage or a civil partnership.
To our own children, we can gift up to £5,000 per child; for our grandchildren, £2,500 per grandchild; and to any other person we may give up to £1,000 free of any inheritance tax implications.
Annual allowance
For slightly bigger gifts, we each have an annual allowance of up to £3,000 which can be given away tax-free in each tax year. This considers all gifts made within the whole tax year, other than those listed above which are exempt.
As a bonus, we can carry forward our allowance from last tax year if it hasn’t been used, but for one year only. This means that, if we have not made use of our allowance for this and last tax year, we can give away £6,000 without using up any inheritance tax allowance.
Lifetime giving
We can give away funds during our lifetime over and above the allowances above, bearing in mind that we must survive for seven years after making the gift for it to fall outside of our estate for inheritance tax purposes.
If estate planning is started early, lifetime giving can be an effective tax planning method, though is of course not a guaranteed one.
Spouse exemption
We are entitled to give an unlimited amount to our spouse or civil partner, be it at Christmas or any other time of year. As well as being a welcome gift, balancing the assets between spouses or civil partners can be a useful tool of estate planning depending on the circumstances. This could include placing the beneficial ownership of an investment property in joint names so as to maximise the lower rates of income tax. Farmers and business owners should also consider passing up to £1million of their assets to their spouse as the newly-introduced cap on such assets is not transferrable to a spouse on death.
Discretionary trusts and IHT savings for grandchildren
Moving onto bigger potential inheritance tax savings, we can make use of a discretionary trust as a way of creating potentially large savings for inheritance tax for future generations. Each individual can place up to £325,000 into a trust every seven years without giving rise to a charge to inheritance tax. Therefore, a quartet of generous grandparents could make £1.3million available to be used for the benefit of their grandchildren which could otherwise be taxed at 40% on death. This should go some way to alleviating VAT on school fees.
Nil rate band discretionary trusts
Widows and widowers who have remarried can include a specific trust in their will to capture a tax-free allowance of £325,000 which could otherwise be wasted.
Gifts out of surplus income
If we earn more than we need each year, rather than adding to the size of our own estate and thus the inheritance tax burden on our deaths, we can make gifts from our regular income.
If it can be shown that these funds were not needed and did not impact our standard of living, they will be free from inheritance tax. For this reason, it is important to keep detailed statements and records.
Family investment companies
A more structured way of passing on our wealth than outright giving is to set up a family investment company (FIC). This is an incorporated company registered with Companies House to hold family assets.
The benefit of using a FIC is that we can decide what shares to give to family members, thereby retaining control over the assets until our children are ready to deal with them. It would also mean that the shares belonging to our children would fall out of our estate if we survive for seven years after giving them away.
Agricultural property relief and business property elief
If we own qualifying agricultural or business property, there are additional allowances available to allow us to pass these on to our children or grandchildren.
Although these reliefs have attracted a lot of negative press due to the recently imposed £1million cap, it is important to ensure that our planning utilises them if available.
Charitable giving
In keeping with the spirit of Christmas, we are entitled to give as much to registered charities as we like without any charge to inheritance tax.
To encourage this further, our estate will also benefit from a reduced rate of inheritance tax on our death if we leave at least 10% to charity in our Will. This can result in more money being available for our beneficiaries, as our taxable estate would be charged at 36% for Inheritance Tax rather than the usual 40%.
There are many ways to use giving, be it at Christmas or elsewhere in the year, to protect and manage your wealth. The best way for you will depend on your own personal circumstances.
If you would like to ensure that your estate planning is appropriate for your and your family’s needs, do get in touch and we would be delighted to assist you. Until then, we wish you a peaceful and prosperous Christmas and New Year.
