If you are thinking of giving away money this Christmas you need to make sure you have considered all the implications, otherwise you could end up in trouble with the taxman.
Here are four tips for tax-efficient giving:
1. Junior Isas
The Week
Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.
SUBSCRIBE & SAVE
Sign up for The Week's Free Newsletters
Join more than 350,000 subscribers and keep yourself informed with a selection of The Week’s most interesting, enlightening and entertaining stories - plus daily puzzles.
Join more than 350,000 subscribers and keep yourself informed with a selection of The Week’s most interesting, enlightening and entertaining stories - plus daily puzzles.
Latest Videos FromThe Week
If you want to give a cash gift to someone aged under 18 ask their parents if they have a Junior Isa. Anyone can contribute to a Junior Isa and by paying the money into it you are helping provide for the child’s long-term future. Money within a Junior Isa can grow free from income tax – which children pay at the same rate as adults – and capital gains tax. Plus, any dividends paid on stocks held within an investment Junior Isa are only taxed at ten per cent.
A maximum of £4,080 can be paid into a Junior Isa this tax year and the money can’t be touched until the child turns 18.
2. Inheritance Tax
Are you feeling a bit peaky? Don't think you can give away huge sums this Christmas in order to avoid an inheritance tax bill after your death. Any money you give away is subject to strict rules when it comes to inheritance tax. If you break those rules your benefactors could find themselves facing a tax bill after your death.
Small financial gifts given for birthdays and Christmas aren’t subject to inheritance tax but once you start giving away more than £250 per person, the taxman starts paying attention.
Everyone is allowed to give away up to £3,000 a year without inheritance tax being an issue - this is known as your annual exemption. You can also carry over unused annual exemption, but only for one year. If you give away more than that and then die within seven years, inheritance tax could be due on the gift if your estate is worth more than £325,000.
3. Wedding Gifts
The exception to the inheritance tax rule explained above is if you are giving someone money to mark a special occasion. If your child has got married this year you can give them £5,000 without inheritance tax being an issue, a grandchild who has married can get £2,500, and anyone can give someone £1,000 in the tax year of their marriage.
4. Marriage Rules
If you are wanting to give your spouse or civil partner money for Christmas then the usual tax rules don’t apply. Married couples or civil partners can pass unlimited money between themselves without inheritance tax being liable - but that doesn't mean he or she will forgive you for not shopping for a more personal present.
5. Charity Donations
You can also donate unlimited amounts of money to charity without inheritance tax being due. If you are thinking of making a charitable donation this year, make sure you Gift Aid it. This allows the charity to claim back the basic rate income tax you paid on the money you are donating from the government.
This means you are boosting your donation by 20 per cent without it costing you a penny. If you are a higher or additional rate taxpayer you can also claim back that tax on charitable donations via your self-assessment.
