As children across the country love to tell their parents, Christmas is all about giving. December is certainly the traditional month for extravagance and a parting of hard-earned cash. For those feeling stuck for ideas, this year Fortnum & Mason is offering hampers ranging from £60 to £6,000. Or if jewellery is their thing, a pair of Bucherer 18-carat white-gold diamond earrings are available at Selfridges for £14,000.
The child that has everything is perhaps missing the 120cm-tall Bobby Teddy Bear from Harrods (£829), and it might be worth throwing in the limited edition Lego Millennium Falcon (£649) to keep them occupied until at least Boxing Day. For the discerning drinker, meanwhile, Harvey Nichols suggests the 30-year-old Sherry Cask Karuizawa whiskey at £13,500.
One thing all of the gifts on this particular shopping list have in common is the potential to generate a tax bill. Admittedly these may be fairly niche purchases, but even a more modest bit of giving can have tax implications. Meanwhile, dwarfing any of the items above, housing might not be just the most expensive thing most people will ever buy but also the most expensive thing they will ever give.
Estimates by Legal & General, for example, suggest as many as one in four UK housing transactions take place with financial assistance from parents. Could it be that some children are planning to raise the topic of the difficulty of saving enough for a deposit over Christmas lunch? Parents may wish to be prepared.
Turning to education, grandparents who give the gift of school fees can nowadays easily reach a present size of £250,000 per child, dwarfing the cost of the Rolex Oyster Yacht-Master II offered this year for £14,350.
A surprise inheritance tax (IHT) bill has never knowingly been included in a letter to Father Christmas, so the festive season can be a timely moment for advisers to remind clients of the tax rules for gifts. To recap, the residence nil rate band of £125,000 for the current tax year is due to increase by £25,000 a year up until 2021, with the nil rate band of £325,000 due to remain at the same level until then.
On a person’s death, people they have given gifts to over the previous seven years will be charged IHT on anything over that total. In 2017/18, HM Revenue & Customs figures show an eye-catching £5.2bn was received by the Exchequer in this format – an increase of 8% on the year before.
Advisers and their clients should be familiar with the fixed exemptions available each year: £3,000 of gifts (the annual exemption); wedding or civil ceremony gifts up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child); payments to help with another person’s living costs – for example an elderly relative or child under 18; gifts to charities and political parties; and small gifts up to £250 per person (as long as another exemption has not already been used on the same person).
It may be worth reminding clients that anything that has a value counts as a gift – including money, investments, property and possessions including family heirlooms. Most clients will probably forego the previously-mentioned earrings from Selfridges, but may pass on that beautiful bracelet that belonged to a great-grandmother and has been deemed valuable enough to include on the house insurance.
They need to be aware it still counts as a gift with value as far as IHT is concerned. A loss in value when something is transferred also counts as a gift. So parents who have generously given their children their £500,000 house but only asked for £300,000 in return have in fact given them a gift of £200,000 for IHT purposes, and potentially slipped in a tax bill without realising.
Normal expenditure out of income
Advisers should also consider the normal expenditure out of income exemption, often forgotten about despite being so old the year it first came into effect was the same year Band Aid had the Christmas number one with “Do they know it’s Christmas” – 1984.
The exemption applies where the taxpayer can demonstrate a gift formed part of the transferor’s normal expenditure, was made out of net taxable income, and left the transferor with enough income to maintain their normal standard of living. Clearly, there are huge benefits in keeping accurate records of gifts and their verified value in order to avoid any lack of clarity and conflicting estimates later on.
In an additional layer of complexity, gifts should also be taken into consideration when assessing capital gains tax (CGT), which can apply not just when an asset is sold, but also when given away. As an example, parents who give shares or property to their children may still be liable to CGT based on the market value of the gifts at the time of giving, even if they receive no money for them.
Under the current framework, IHT is not just a tax for the uber-wealthy. Many families face IHT bills without being prepared for them. This December, a reminder of the tax rules of giving and the importance of planning ahead may be one of the most useful gifts advisers can give.
John Humphreys is inheritance tax specialist at WAY Investment Services