A Christmas gift that keeps on giving

At last, a Christmas gift that makes last minute, late night panic buys a thing of Christmas past. Gifting cash or valuable assets, especially those you were planning to pass on anyway, is practical, thoughtful, and pleasingly easy to wrap.  

Gifting while living, as it’s known, could open many doors for those you love, whether that’s the possibility of private education, a mortgage-free future or launching a new business. And making a gift at Christmas, well ahead of tax year-end, means you can take advantage of an unused gift allowance and give yourself a little bonus too.

What are the tax advantages of gifting while living?

You can gift a total of £3,000 a year and make any number of smaller gifts up to £250, as long as you don’t give it to the same person. Plus, if you didn’t use your allowance last year either, you can add another £3,000 under the ‘carry forward’ rules.  

As announced in the 2024 Autumn Budget, most unspent pension savings will become liable for inheritance tax (IHT) from 6 April 2027, making gifts made now an even more attractive option for passing on money or assets, tax free. By making a gift, you’re reducing the size of your overall estate for inheritance tax purposes, which is like giving your loved ones a present for both today, and tomorrow. 

Making more generous gifts

If the gift you’re considering is worth more than your gifting allowance, combined or uncombined, it may still be possible to give it away without attracting tax. According to HMRC, anything you give away can be a gift, including property, land, stocks and shares listed on the London Stock Exchange, jewellery or cars. It just depends on how and when it is given.

These larger gifts are called potentially exempt transfers or PETs, and the name ‘does what it says on the tin’. Your gift is ‘potentially exempt’ from IHT so long as you survive for a further seven years. If you die less than three years after gifting and the gift isn’t part of your available nil rate band, of £325,000, then it will be subject to the full rate of IHT. However, the good news is that after three years, the amount of IHT tapers down by 8% each year until you reach the end of the seven-year mark, so the longer you live, the more you give.

It’s important to let your financial adviser know that you’re considering making a gift, and also recording dates and amounts, in case HMRC queries the timing of the gift.

Gifting second properties such as holiday homes or buy-to-lets

As mentioned previously, it is also possible to gift property in order to keep it in the family for future generations. As with all lifetime gifts, the seven year rule applies but there could be a sting in the tail (unless you’re giving to your spouse or civil partner). Any gifted asset has a market value. So, if your beneficiary sells the gift and it’s gone up in value since you bought it, they could be liable for capital gains tax. In all likelihood however, this would probably still be less than 40% IHT.

Making ongoing regular gifts

Who says it can’t be Christmas all year round? You can make regular gifts to help your family out financially on a regular basis, and it can be as tax efficient as a one-off festive gesture. The practice is known as ‘normal expenditure out of income’ and it’s often overlooked, although it’s become much more popular in the last year (since the rules about passing on unspent pension pots changed).  

If you cover regular expenses for your family, such as school fees or health insurance, using your disposable income, it’s tax free and doesn’t eat into your annual gifting allowance. Contributions to a Junior ISA or child pension can also count as ‘gifts out of normal expenditure,’ and could be be a good way to pass on money to grandchildren. These gifts must be from income not capital and must not effect your own standard of living.

The other bonus is that these sorts of gifts are reversible. You can switch payments on or off if you find you need the money again. 

Knowing how much to give and when

If you’re considering making a gift this Christmas, it's  worth considering if making a lump-sum gift could leave you struggling later down the line if your circumstances change. This is where your financial adviser comes in. They will typically create a ‘cash flow model’ of projected income and outgoings across your expected lifetime. This shows what you can confidently afford to give away now, and still feel confident you’ll have a comfortable retirement.

This Christmas, gifting wealth or assets could be the gift that keeps on giving. 

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and can go down as well as up. You may get back less than you invested. 

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Although anyone can contribute to an ISA or pension for a child only the parent/legal guardian can open them.