Why gift-giving doesn’t need to be taxing

There are many ways to give gifts this festive season without incurring tax headaches, writes Olivia Minghella

There is a chill in the air, a twinkle of lights in every window and children up and down the country are becoming increasingly excited with every passing moment. It’s undeniable – the festive season is well and truly upon us. It’s a time of joy, merriment, and of course giving.

The tradition of exchanging presents at Christmas-tide pre-dates even Christmas itself, dating back to the giving and receiving of gifts at pagan winter festivals. Whatever the occasion prompting gift-exchange this year, those considering making significant gifts would do well to give thought to the tax implications before doing so – lest the recipient be taken by surprise by a nasty tax bill down the line.

Unlike in many other jurisdictions, there is no ‘gift tax’ as such in England and Wales. For inheritance tax purposes, lifetime gifts from one individual to another are ‘potentially exempt transfers’ (known in the industry as ‘PETs’ – not to be confused with the kind that might steal your turkey leftovers). Inheritance tax is not immediately payable on a PET but if the donor dies within seven years of making the gift, inheritance tax may be payable on the gift at a rate of up to 40 per cent.

However, individuals each have an annual exemption in relation to lifetime gifts of up to £3,000 per year. This exemption (or the remainder of it) may be carried forward once into the following tax year if it is wholly or partly unused. Individuals may therefore give up to £3,000 worth of money or other assets away (in total) each year without inheritance tax implications. I’ve got my eye on some rather nice new shoes, if anyone is asking.

Generous gift-givers who wish to give more valuable gifts may be in a position to take advantage of the normal expenditure out of income exemption from inheritance tax. A gift, regularly made, as part of a donor’s normal expenditure out of his or her income may qualify for the exemption. However, donors must be careful that they are left with sufficient income to maintain their usual standard of living after the gift or gifts have been made.

An attorney, who is considering making gifts on behalf of a person who has lost capacity, under a lasting power of attorney should also think carefully when deciding what to hide under the Christmas tree this year. Subject to any restrictions in the lasting power of attorney itself, an attorney can make gifts of the donor’s money or property to people who are related to or connected with the donor on ‘customary occasions’.

However, the size of any gift must not be ‘unreasonable’ having regard to all of the circumstances including the size of the donor’s estate. The festive season no doubt falls within the scope of ‘customary occasion’, but attorneys who are unsure whether the gift that they intend to make is of a value that might be deemed ‘unreasonable’, or wish to make larger gifts for tax planning purposes, may consider making an application to the Court of Protection for an order authorising the intended gift.