Modern-day Scrooges aside, the festive season is largely welcomed as a time of celebration. It’s our annual opportunity to eat, drink and be merry with family and friends.

Less welcome, perhaps, is the sobering reality that all this cheer comes at a cost. UK consumers are expected to have spent a staggering £22.7 billion over the festive period, with our outlay on gifts and celebrations rising from £416 per person in 2023 to £433 per person last year, driven partly by above-inflation price increases.

During the season of goodwill, gifts of money can make for a generous gesture from parents or grandparents, whether as a present, a direct investment in a loved-one’s financial future, or a helpful way of easing the economic strain amid ongoing cost-of-living pressures. But it’s worth noting that gifts can come with important financial implications at whatever time of year.

Tax on legacy giving

Typically, gifts made from regular income are exempt from tax. However, when it comes to passing on wealth and assets, tax obligations can apply depending on what is gifted and to whom, as well as the value of the gift and when it was given.

For Inheritance Tax (IHT) purposes, items counted as gifts include money, household and personal goods (such as jewellery, antiques, a house or land), stocks and shares listed on the London Stock Exchange, and unlisted shares held for less than two years before your death.

And if they are gifted less than seven years before the person giving them dies, the recipient could be liable to pay IHT on them.

If IHT does apply, the amount to be paid is governed by what’s known as the ‘seven-year rule’, with gifts made within three years of the donor’s death taxed at the standard 40% rate of IHT, and those made between three and seven years of death taxed on a sliding scale known as ‘taper relief’. This only applies if the total value of gifts in the seven years prior to death exceeds the £325,000 tax-free threshold.

Gifting exemptions

While living for seven years after making a gift ensures it will be tax-free (unless it is part of a trust), there are other circumstances where gifting will not incur a tax burden.

Gifts made to legally recognised spouses or civil partners, for example, are exempt from IHT – as long as the recipient permanently lives in the UK. Furthermore, the ‘annual exemption’ allows you to give away up to £3,000 worth of gifts every tax year without them being added to the value of your estate, with an unused annual exemption carried forward to the next tax year (for one tax year only).

Another consideration is the small gift allowance. This provides the means to gift up to £250 to an individual each tax year (as long as another allowance has not been used on the same person).

Complex implications

When it comes to parents or step-parents gifting larger sums to children under the age of 18, there are further tax issues to consider – specifically where the gift earns interest or generates dividends. If this is the case, and the income exceeds £100 in a tax year, then this will be taxed at the rate of income tax paid by the parent who made the gift. This doesn’t apply if the gift is made by a grandparent or if the payment is made into a Junior ISA, where up to £9,000 can be invested in the 2024/25 tax year.

And when gifting a larger asset – a property, for example – there is also the potential for capital gains tax (CGT) to apply if that asset has increased in value. Any charge will only be made if gains exceed the tax-free allowance, known as the annual exempt amount, although it is important to note that this has reduced significantly in recent years and currently stands at £3,000 for the 2024/25 tax year.

So, while Christmas will always be a time for giving, when it comes to gifting money and assets, it’s easy to see how a simple gesture can have complicated implications for your wealth and for the finances of recipients all year round.

In this context, the support of a professional financial adviser can provide valuable guidance, helping you deliver on your good intentions and bring the maximum amount of cheer to your loved ones.

The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Wealth Management or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.