It’s that time of year again when financial gifts may be given… and HMRC is watching.
Tax is never far away from anything you do and making gifts to children at Christmas is no exception. There are a few key tax areas you should bear in mind.
Inheritance tax (IHT)
As with any gift you make, the first consideration is IHT. In practice, this will generally not be an issue if in the tax year:
- All your gifts to a single child total no more than £250; or
- The total gifts you make in a year do not exceed £3,000; or
- The gift is one that is regular, out of income and does not reduce your standard of living; or
- You survive seven years after making the gift.
If that quartet does not cover your gift, or if you are making your gift via a trust, seek advice.
Income tax
The next tax to watch is income tax. If you make a gift to your minor, unmarried child and the income the gift generates in a tax year exceeds £100, then that income is taxable as if it were yours. When interest rates were near zero, this £100 per parent, per child ceiling was somewhat academic, but now it is much less so – £2,000 earning 5% interest will get you there. One way to sidestep this tax trap is to make any gift (up to £9,000 total in 2023/24) into a Junior ISA (JISA). The law excludes JISA income, whether interest or dividends, from UK income tax.
The £100 rule only applies to parental gifts, so any income generated by gifts from grandparents or others is the child’s own for tax purposes. As every child has a personal allowance of £12,570, only the wealthiest need to worry about any tax bill.
Capital gains tax (CGT)
CGT may also be payable if you are gifting investment funds, shares or property that you already own. As such, gifts will normally involve trusts, so once again, do seek advice. Each child has the usual annual CGT exemption (£6,000 in 2023/24, reducing to £3,000 from 2024/25 onwards). There is no corresponding CGT anti-avoidance rule to the £100 parental gift income tax rule. Again, JISAs are useful here as any gains within a JISA are free of CGT.
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