Are you planning to gift money to loved ones this Christmas?

With the Christmas season almost upon us, you may be thinking about what gifts your loved ones would benefit from this year – particularly your adult children. Whilst the cost-of-living crisis continues to put strain on younger people’s finances, giving them money instead of a physical gift could be a welcome alternative.

Money can make an excellent Christmas gift for two reasons. It can be great for young family members just getting started in the adult world.

However, it can also make sense for you, if you are reviewing your estate planning strategy and want to reduce the potential amount of inheritance tax you may be liable for.

Obviously, if you are feeling especially generous, you will need to consider the long-term impact of giving larger amounts of wealth away. Whilst this is not the place to review all the inheritance tax rules and regulations, there are two things to bear in mind here.

Firstly, anything you give away will not count towards a future inheritance tax bill, provided you live for seven years after the gift.

Secondly, some financial gifts become immediately free of IHT, so you need to know the limits and rules around this.

What cash gifts are tax free?

At Christmas, most casual monetary gifts will fall within HMRC's allowable limits.

However, more generous, or ongoing transfers, can potentially cause tax issues for you and/or the recipient, so in this case some financial planning is advisable.

In terms of giving to other people, such as children, grandchildren, friends or other relatives, cash presents can be free from tax, providing they meet the following conditions:

• Total gifts made by you in a tax year are less than £3,000 – or £6,000 for a couple. You can also carry forward any unused £3,000 allowance from the previous tax year, making financial gifts of up to £6,000 possible this Christmas – or £12,000 for a couple.
• Small gifts of up to £250 can be made to any number of people in the tax year, provided the total to any one person does not exceed £250. If it does, this exemption does not apply and all gifts would start to use up your £3,000 allowance.
• Gifts out of regular income that are part of normal ongoing expenditure can also be made. These gifts must be “regular” in nature, made from income rather than capital, and cannot affect the donor’s standard of living.
• Money can also be given as a gift tax-free to celebrate a marriage or civil partnership, of up to £5,000 from each parent, £2,500 from each grandparent and up to £1,000 from any other person. These do not use up any of the other allowances. So could be good for any festive time weddings.

Longer term financial gifts

Most parents, grandparent and guardians want to provide the best possible future for their children or grandchildren. By starting an investment plan for them, you can help build a tidy nest egg that can make a big difference help when they grow up and maybe look to go to university or get on the property ladder.

For this reason, you might want to consider starting a Junior ISA or 'JISA'. A JISA is an Individual Savings Account where you can put money away for your child, tax-free, that they can access once they reach 18.

JISAs work in a similar way to adult ISAs by allowing you to save money for your child without paying Income Tax (or Capital Gains Tax) on the interest or returns you receive.

You can open a JISA as long as you’re either the parent or guardian of the child, but the money belongs to the child. This means that you (or any friends and family) can pay money in, up to the annual JISA allowance each tax year, but you won’t be able to make any withdrawals. Once your child turns 16, they’ll be able to take control of the account and add money to it if they want to, but they won’t be able to withdraw any money until they turn 18. The annual allowance for JISAs for the 2023/2024 tax year is £9,000.

If you’re interested in a savings option with a bit more flexibility, so you can access the money if you want to, you might prefer to open a children’s savings account.

However, putting money into a child’s pension is the ultimate long-lasting legacy. Only a parent or guardian can set up a pension for a child, but then anyone can contribute. You get tax relief on the contributions and as the child won’t be able to access the funds until they reach the age of 55 (based on current legislation) there is plenty of time for the money to grow. Pensions are therefore an attractive long-term option. You can pay up to £2,880 into a child’s pension for the 2023/24 tax year. When you take into account the 20% in tax relief from the government, this adds up to £3,600.

Do these financial gifts fit into your long-term financial plan?

When making any financial gift, you need to be clear about your financial plans going forward.

Whilst gifting can help reduce your IHT liability, you should feel comfortable that you can afford to part ways with this money now, and be sure that it is unlikely to put your future financial viability at risk. So only give away what you can afford to lose; and don’t risk your retirement or leave yourself short of money to cover future possible care costs.

So, as you’re preparing to make a financial gift this Christmas, perhaps consider discussing the potential impact on your wealth with a Kellands financial planner first. Our experts are equipped to help make your goals possible, including giving financial gifts to your loved ones, and can adjust your financial plan according to these wishes.

What’s more, we can talk you through the specific tax implications of any financial gifts you offer to others, whether as a one-off or on a regular basis. If you’d like to include the recipient of the gift in these conversations, we’re happy to discuss these plans with anyone you choose to involve.

This article is for general information only and does not constitute advice.

The Financial Conduct Authority does not regulate estate planning or tax planning.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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