As we approach the holiday period, some may be considering making gifts to family members – whether that be grandparents giving money to their grandchildren, or parents helping out their children during this season of giving. So, in this festive spirit, we thought we’d share three of the most popular financial gifts that you can make at this (or any!) time of year.

1. Gift to reduce the value of your estate

There are lots of reasons that we give gifts. It can be to build or reinforce relationships, to help others or to show love and devotion.

On a more practical level, making gifts is also a way of reducing the value of your estate for Inheritance Tax (IHT) purposes. There are several ways that you can give gifts that mitigate any IHT liability:

• Gifts to a spouse or civil partner – No IHT is payable on transfers between most married couples or civil partners in the UK. Effectively the amount liable to IHT is deferred until the death of the second spouse/civil partner.
• Gifts under the ‘annual exemption’ – Each individual can give away up to £3,000 in total, every tax year, free from IHT. Plus, you can use your £3,000 from last tax year if unused (as long as you’re fully using your £3,000 for the current tax year). So, a married couple could give away £6,000 to their children each tax year, and £12,000 if the previous year’s allowance has not been used.
• Small gifts – Unlimited gifts of up to £250 per recipient per tax year are exempt from IHT (as long as you’re not gifting to someone you’ve already made a larger gift to).
• Gifts on marriage – Any gifts you make in consideration of a marriage or civil partnership are exempt from IHT, as long as you make the gift before the wedding and the wedding goes ahead. You can gift up to £5,000 to a child, £2,500 to a grandchild, and £1,000 to anyone else.
• Gifts to charity – Any gifts to qualifying charities, universities or political parties are exempt from IHT, whether you make them in your lifetime or leave them as a legacy in your will.

2. Gift to your children and grandchildren

If you don’t want to buy your child or grandchild the latest toy this Christmas, you could consider making a financial gift.

As a parent, you’re able to contribute up to £9,000 into your child’s Junior ISA or Child Trust Fund.

Depending on your needs and risk profile, you have a choice of either Cash or Stocks and Shares Junior ISAs, and any returns are free of both Income Tax and Capital Gains Tax. Note that only parents/legal guardians and not grandparents can open a Junior ISA although anyone can contribute to it.

Another option for a young child is to consider starting a pension. You can contribute up to £2,880 each tax year into a pension for a younger child, with the 20% tax relief available taking the total contribution to £3,600. If the child has earnings of their own above £3,600 pa, higher amounts can be contributed.

If you’re thinking of making a financial gift to your child or grandchild, then Premium Bonds are also an option. Anyone aged 16 or over can buy them, and parents, legal guardians, grandparents, and great-grandparents can invest on behalf of their child, grandchild or great-grandchild aged under 16.

You’ll need to nominate a parent or legal guardian to be in charge of the Bonds until the child is 16 – they will be sent the Bond record, any prizes won and any payments for cashed in Bonds.

3. Gift from income

This brings us on to one of the most underused IHT exemptions, ‘gifts out of income’. Providing a donor satisfies three conditions, all gifts out of income will be treated as immediately exempt from IHT. That’s right, no seven-year clock!

The qualifying conditions are:

1. The gift must be made as part of normal expenditure of the donor, i.e. regular amounts.
2. The donor must retain sufficient income and maintain their standard of living.
3. Gifts must be made out of income and not capital.

If we take someone who is 67 years old, with the life expectancy of 87 and surplus income of £1,000 per month, they could potentially gift £240,000 over a 20-year period, thus saving £96,000 of IHT. Whilst the savings may be more modest for others, this is a very useful exemption to be used in your financial planning.

For those with surplus capital rather than surplus income, there are numerous other IHT mitigation options available including outright gifting, loan trusts, gift trusts, discounted gift trusts, AIM portfolios etc.

This is a very complex area so if you would like to discuss how you can potentially gift money at Christmas, without incurring IHT, please don’t hesitate to get in touch with the Grosvenor Wealth Management team.

PLEASE NOTE: Grosvenor Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority. The Financial Conduct Authority do not regulate tax planning, estate planning, or wills. The value of investment can go down as well as up and you may not get back the original amount you invested. Tax treatment is dependent on individual circumstances and may be subject to change. Tax planning is not regulated by the Financial Conduct Authority.