Tax Efficient Gifting

Christmas is a time for giving, tax efficiently of course!

December 15, 2021

Maximise your generosity with tax-efficient giving this Christmas! Explore TAG Accountants Group's expert advice on IHT, CGT, trusts, and more.

Gift generously AND tax efficiently

As Christmas approaches, here at TAG Accountants we are wondering how 2021 has flown by so quickly. Consequently, in this season of giving we thought we would summarise a number of the of ways to ensure the taxman does not always benefit from your generosity with some timely tax planning reminders.

Gifting in an IHT and CGT friendly way

There was plenty of expectation that the Chancellor would announce changes to inheritance tax (IHT) rules in the Autumn Budget, but the reality was, that the rules have remained broadly unchanged. This means that every tax year individuals can make gifts of up to £3,000 in total and that that amount is not then included in their cumulative total of gifts for IHT purposes. If you were being extremely generous and exceeded the £3,000 annual exempt amount, provided it is an outright gift to an individual, there would be no inheritance tax payable provided you survive for 7 years. 

It is important to be aware that the gift of an asset other than cash could also give rise to a capital gain and capital gains tax (CGT) may be payable where the asset has increased in value. However, if you give away a business asset such as shares in your trading company, it is possible to make a claim to hold over the gain so that no CGT is payable on transfer. Please contact us for further advice.

Regular gifts out of income

Expected restrictions on the exemption from IHT for regular gifts out of an individual’s income were not made in the Autumn Budget. IHT rules are about taxing tax transfers of capital, so if the gift donor can demonstrate that the gifts are made from surplus income then the transfers are not subject to IHT. The exemption applies where there is a regularity to the gifts being made, for example, as a standing order to pay school fees. HMRC can ask for proof that the payments are being made from post-tax income and do not impact the donor’s normal lifestyle. We advise donors using this exemption to maintain detailed records and we can advise you on a format for this if required.

Use of trusts for gifting assets

Another strategy remaining available, at least for the time being, is the use of CGT hold over relief when assets are transferred into or out of a trust.

This means that a non-business asset, such as an investment property, can be gifted without paying CGT. The relief applies where the transfer is subject to IHT, but where the value transferred is up to the £325,000 IHT nil rate band. This means that the transfer of the asset can take place without IHT, or CGT liabilities being triggered. The downside is that the gift eats into the IHT nil rate band and there are costs involved in setting up the trust, so this needs to be weighed up against the amount of tax being saved using a trust.

As an example, a higher rate taxpayer wants to gift his adult daughter an investment property worth £300,000 that originally cost him £100,000. A direct transfer of the property to his daughter could trigger a CGT bill of £56,000 on a gain of £200,000.

By transferring the property to a trust for the benefit of his daughter, then the transaction would be immediately chargeable to IHT but covered by the £325,000 nil rate band. The resulting gain could then be held over so that no CGT is payable.

At some future point, the property could be transferred from the trust to his daughter when there will be a further opportunity to hold over the capital gain. 

We can provide support if this is of interest alongside a competent trust lawyer who will set up the relevant trust.

Gifts to charity

Just a reminder that for charitable gifts, where taxpayers should Gift Aid any payments to charity to provide additional financial benefit to the charity. Remember too that higher rate taxpayers obtain additional tax relief on the grossed-up amount donated. 

So, where an individual makes a £20 cash donation to charity the charity can reclaim a further £5 from HMRC making a gross gift of £25. Where the individual is a 40% higher rate taxpayer then a further £5 tax relief can be claimed under self-assessment, reducing the net cost of the donation to £15.

To Gift Aid, the donation, the donor is required to make a declaration that they are a UK taxpayer. If you have not suffered sufficient UK tax to support the Gift Aid amount, then you will be taxed on the shortfall.

Please note, Gift Aid does not just apply to gifts of cash. Many charity shops will now sell donated items on your behalf and are able to treat the sale proceeds as Gift Aided donations. You can also gift quoted securities and land and buildings to charities and claim Gift Aid on the market value of those assets.

Christmas parties and employee gifts

Assuming Omicron does not scupper them this year, there will no doubt be more face-to-face employee Christmas parties this year.

Last year many businesses put on “virtual” Christmas parties and HMRC accepted for there to be no taxable benefit for the employees involved.

There continues to be no taxable benefit for employees on expenditure provided that all staff are invited, and the cost does not exceed £150 a head, inclusive of VAT.

If you have also had a spring/summer event in 2021 (which some did as alternatives to 2020 Christmas parties), then provided, the combined cost of the two events in 2021 is no more than £150 a head, there would be no taxable benefit in kind. Should the combined costs of both events exceed £150 per head then only one event would qualify for the exemption.

It is also worth noting that certain gifts to staff at Christmas are also tax-free if structured correctly. Employers can provide directors and employees with certain benefits in kind tax-free. This non-cash exemption applies to small gifts at Christmas, on their birthday, or other occasions which are worth no more than £50 to staff and can include gifts of food, wine, or even store vouchers.

TAG Accountants is here to help.

So, it is worth remembering that with a bit of planning, generosity at Christmas time can be tax efficient. 

Our team at your Wolverhampton Accountants TAG Accountants is here to provide guidance and support. If you would like to know more, please call 01902 783172 or alternatively, just click HERE to contact us via the form on our website and one of our friendly experts will be in touch.

Finally, we wish all our clients and contacts a Merry Christmas and a prosperous New Year.