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Bah Humbug! Is the Taxman such a Scrooge?


At Christmas we experience the great enjoyment that comes from giving members of our family a superb gift. We may even prefer that feeling to receiving one ourselves. It also that special time of year when we think about the loved ones we have lost and the youngsters in our family with their whole life ahead of them. Can that particular Scrooge, the taxman, actually be encouraged to join the party? Surprisingly, the answer can be ‘Yes’.

Gift wrapped

Starting with one eye on Christmas Future, there are a variety of gift exemptions from IHT to consider.

First, gifts made out of income are ignored. Many older clients will be exhibiting a strong savings bias and, without a great deal of thought about it, be building up large cash balances. The wealthier client who proves liable to inheritance tax, will add a kicker worth two thirds to the value of any gift made in this way being the 40% tax saved divided by the net value of that gift retained in a taxable estate. There will be many deserving causes – but assistance with grandchildren’s education or ISA subs spring to mind.

Finer details

Otherwise, there is an annual exemption of £3,000 for gifts of capital. Any unused element can be carried forward to the next year. Ceremony gift allowance each year of either a £1,000 to a relative or friends, £2,500 to (great) grandchildren and £5,000 for our children. (Birthdays do not count as a ceremony.) Small gifts of £250 and under are fully exempt from tax. They can be given to anyone and as many times as you’d like, unless they have already been a recipient of the full £3,000 gift allowance in that year.

If a gift falls outside these allowances, it is considered a potentially exempt transfer (PET) and is subject to the ‘7 year’ rule. It is potentially exempt because no tax is paid at outset and requires a ‘tax event’ before it triggers a liability. The rule states that a gift will be exempt from tax so long as the giver survives longer than 7 years from the date of the gift, at which point it falls out of their taxable estate. For 3 years from the date of the gift, it is still subject to the full 40% IHT rate, if the donor dies in that period. From this point on, the gift (amount above the nil rate band) becomes subject to taper relief, with the potential tax dropping by 8% each year until it becomes tax exempt 7 years after the date of the gift. With life expectancies higher than many believe, wealthier clients will look carefully at this important planning opportunity.

Christmas 2088

One of the options that offers particular attractions to grandparents for gifted investment is the JSIPP. Helping to lay down the basis of a retirement plan for grandchildren need not be so expensive if you have an entire life time for money to grow. Compounded returns on equity investments over many decades are likely to produce impressive outcomes. Grandchildren born today whose family can afford to allocate even a few thousand pounds to a JSIPP will be able to enjoy a holiday of a lifetime – in the next century. These figures must be estimates but £10,000 invested at birth and held in equities over 70 years at 5% real return will produce a pot worth just over £300,000. And spread this over just three years, (keeping annual net contributions below £2,880), and the tax man will foot 20% of the cost. Of course if the goals are shorter term, such as university education or a deposit on a property, the JISA option is also available.

No one can argue that when it comes to Christmas Present, how nice it is to find some golden coins at the bottom of your stocking! Merry Christmas!



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