An unusual Christmas gift idea

lovemoney staff
by Lovemoney Staff lovemoney staff on 14 December 2012  |  Comments 7 comments

This unusual Christmas gift idea will cut your tax bill by thousands of pounds!

An unusual Christmas gift idea

In a Lovemoney survey, we found that inheritance tax was one of Britain's most hated taxes, second only to the dreaded council tax. In fact, 45% of you wanted inheritance tax - or IHT - scrapped altogether.

But no such luck. IHT won't be abolished anytime soon. In the meantime, why not take every precaution to cut your IHT bill as much as you can? Christmas is, strangely enough, the perfect time to do it!

Inheritance tax - the basics

IHT is a tax levied on the value of an individual's estate on death and is charged at a whopping rate of 40%. This tax year (2012-2013), IHT applies where an estate is worth more than the current IHT threshold of £325,000, or £650,000 for couples.

Why should I care?

At one time IHT was seen as a tax on the wealthy alone. Only a small minority had estates worth in excess of the threshold. But rampant house price growth has changed all that, pushing many more people up into the danger zone where their estates are now valued above £325,000.

Don't forget, any amount over £325,000 is subject to a 40% tax charge. This is a huge part of your wealth to lose to the taxman, rather than passing it onto your family. But, thankfully, there are plenty of ways you can avoid a painful IHT bill - or at least reduce it. I'm going to look at one in depth which is particularly good to know at Christmas.

Cash gifts

IHT not only applies to the value of your estate on death, but also to cash gifts given during your lifetime. The rules work in this way to prevent people from giving away large amounts of money to slash the value of their estate below the threshold, and therefore escape IHT.  

If you survive for seven years after making a gift it will become what's known as a 'potentially exempt transfer'. Potentially exempt transfers - or PETs - are no longer subject to IHT.

But certain gifts are IHT-free anyway. For example, you can make gifts to your spouse or civil partner, UK charities, any UK political party* and national institutions such as museums, universities and the National Trust, all of which are exempt from IHT whether the gift is made during your lifetime or as part of your Will. However, gifts made to an unmarried partner that you're not in a civil partnership with won't be exempt.

Annual exemptions

On top of that, you can give away cash gifts worth up to £3,000 in each tax year which are free of IHT when you die. Any unused allowance from one year can be carried forward to the next, giving a maximum allowance of £6,000. But the allowance can only be carried over once.

Additionally, you can make small gifts worth up to £250 to as many people as you like in any one tax year. But remember you can't use the small gifts allowance alongside any other exemption when you give cash to the same person.

All this means you can give money away as a gift this Christmas specifically to avoid incurring a hefty tax penalty later on.

Regular cash gifts

Better still, you can also make regular cash gifts which won't take an IHT hit. To qualify, the gifts must be paid from your after-tax income and not taken from any source of capital, such as your savings. The gifts must also not affect your ability to maintain your standard of living. In other words, you'll need to be able to afford to make the regular gifts from your normal income, without reducing your assets.

You can make gifts monthly if you wish, or on regular occasions such as Christmas and birthdays. This would be a great way of building up a savings nest egg for a relative without the taxman taking a bite.

*To qualify for IHT exemption, the gift must be made to a UK political party which has at least two members elected to the House of Commons, or has one elected member but the party received at least 150,000 votes

This is a Lovemoney classic article, recently updated.

More on Christmas and tax:

Twelve good, cheap Christmas gift ideas

The best Secret Santa gifts

The worst charity Christmas cards

Top credit cards for Christmas shopping

Top 10 cheap and free Christmas activities for kids!

How to get your online self-assessment tax return right

How to make sure you’re on the right tax code

Beware this tax scam

The true cost of having a company car

How to get a tax refund

Ten ways to avoid Capital Gains Tax

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Comments (7)

  • Mike10613
    Love rating 626
    Mike10613 said

    If anyone else prefers to give the Go Go Hamster, you can get one at Amazon:

    http://www.amazon.co.uk/tag/go%20go%20hamster/products

    The idea of giving money away before I kick it doesn't really appeal; but if anyone wants to give me money in case they kick it; it's a great idea!

    Report on 19 December 2011  |  Love thisLove  0 loves
  • jenc
    Love rating 1
    jenc said

    So if you don't have enough income to pay tax - and a large house your estate will get done for IHT

    Report on 19 December 2011  |  Love thisLove  0 loves
  • kittzy
    Love rating 32
    kittzy said

    Well, its like everything else, we are all idiots in reality, we dont get up and do anything about it, we are only capable of token gestures, when petrol hit £1 a litre everyone went mad....it has now gone over £1.30.... a litre.. and what do we say....nothing.

    I guess you could say we get what we deserve because we just can't be bothered to object strongly enough.

    xx

    Report on 25 December 2011  |  Love thisLove  0 loves
  • Basia02a
    Love rating 49
    Basia02a said

    Inheritance tax is an excellent tax. People should have to work for their money not get it given to them. The 'allowance' should be higher, but then the tax rate should be a lot higher than 40%, with no exemptions such as the Royal Family. National debt solved

    It is currently all quite avoidable anyway

    Report on 21 December 2012  |  Love thisLove  0 loves
  • Ginnymay
    Love rating 39
    Ginnymay said

    @ Basia02a

    I've already paid tax on the hard-earned money I used to buy my house, that's why my pension is so low now, I put money into the house rather than the pension plan, then the only annuity I can get is rock-bottom thanks to Govt policies. Why exactly should I not be able to dispose of the house as I please when I die, in particular pass it on to my daughter who looks after me, but despite a good degree, can't get any other job, again thanks to Govt policies in no little measure. She is looking at having to sell the house to pay the IHT despite it being her main home, and likely won't be able to buy a comparable home because of the amount of money she will be left with, house prices being what they are around here. Her work is being my carer. I expect you have a well-paid job, if you feel able to make comments like that about working for your money.

    Report on 21 December 2012  |  Love thisLove  0 loves
  • Basia02a
    Love rating 49
    Basia02a said

    GinnyMay, I am not sue why having a well paid job makes inheritance tax less of an issue. I would have thought that it made it more of one. I fact I was made redundant in 2005 and despite paying my taxes for 30 years was only able to claim 6 months jobseeker as I have saved for those 30 years, and now have to live off the savings rather than get any benefits at all. I have paid taxes for 30 years and get nothing back. You must live in a very expensive house if you are having to sell it for IHT. My house is worth way under the IHT limit and it is not small.

    Report on 24 December 2012  |  Love thisLove  0 loves
  • sodit
    Love rating 135
    sodit said

    If you give a tennancy to your daughter, one that will give her security of tenure, then it'll reduce the market value of your home as any buyer would not be able to get her out.

    Talk to a lawyer about it though, the HMRC might have some nasty piece of legislation that messes up this wheeze.

    Report on 26 December 2012  |  Love thisLove  0 loves

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