We all know that Santa’s generosity knows no bounds, and we can look forward to gifts from family and friends at this time of year. It is however important that those who make gifts understand the tax consequences, as part of their overall inheritance tax (“IHT”) planning strategy. Gifting can be mutually beneficial as the donor can benefit in terms of their own IHT mitigation planning.
Regular gifting can be one of the most straightforward and effective ways in which an individual can mitigate their estate’s exposure to IHT, and Santa may be the expert here. We can all learn something from his gifting strategy in the upcoming festive season and embrace the spirit of giving with this in mind.
Small gifts exemption
A person may gift up to £250 to as many individuals as they wish during any one tax year. Santa is accredited with giving millions of presents to children every December, of a value under £250 each. This is effective IHT planning since these will all be exempt from inheritance tax.
If you would also like to make gifts this Christmas, provided they meet the criteria of the small gifts exemption, they will not be brought into an IHT calculation, no matter how many you choose to make.
Regular gifting out of surplus income
Even if you exceed the small gift limit, you may still be able to make tax efficient gifts using the exemption for regular gifts made from surplus income. To qualify under this exemption, the gifts must be made in a regular identifiable pattern and out of surplus income which you do not require to support your usual lifestyle and expenditure. The regularity of Santa’s gifting is in a well established pattern every December so, assuming that Santa’s surplus income is sufficient to cover these gifts, even if they exceed £250 they will be exempt in his final IHT calculation. We are assuming Santa will not live forever!
If you therefore wish to make larger gifts this Christmas, you may consider committing to making these in an established pattern, if you are confident you will also have surplus income available to continue to do so for at least, say, the next three of four years.
Charitable gifting
We are often encouraged at this time of year to consider supporting worthy causes with donations. Gifts to registered charities, no matter what size, are exempt from IHT immediately. You may therefore gift freely (and substantially, if you are so inclined) confident in the knowledge that those gifts will not attract any IHT liability on your estate.
Santa’s charitable giving each year is notable, with millions of presents from him being received from Santa delivered by charities. . All of these gifts will be exempt from his IHT calculation.
Nil rate band allowances
Finally, if a gift made does not qualify for any of the above or other exemptions, the fall back position is that if these are made within your individual nil rate band allowance (presently £325,000 per person), they will not attract IHT on death. These larger one off gifts will reduce the nil rate band available for your estate if you should die within 7 years of the date of that gift. However, if you survive 7 years it will no longer be included in your estate for IHT or continue to reduce your nil rate band allowance.
Given that all of Santa’s gifts are assumed to fall within one of the three above gifting exemptions, it is unlikely that his nil rate band would be used up by any of his gifts. He therefore continues to preserve his full nil rate band allowance for IHT, despite the substantial gifting he carries out. His IHT strategy, although straightforward, is incredibly effective at mitigating his estate’s IHT exposure, with the bonus of inspiring others to embrace gifting at this time of year.
Bearing the above in mind throughout your lifetime will allow you to make gifts confidently at Christmas (and any other time of year) as and when you consider appropriate to your circumstances.
Should you wish any further advice on gifting and your IHT planning then please get in touch with one of our wills and estate planning lawyers.
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Senior Associate
