A Christmas gift of cash is always going to be welcome, particularly in these times of austerity. If you want to make someone's Christmas with a cash gift, here is a summary of how you can make it in an inheritance tax effective way.
Current rules allow you to make outright gifts up to an annual limit of £3,000 with no inheritance tax consequences. Further, if this exemption has not been used in a tax year it can be carried forward (for one year only). This means that if you have not made any capital gifts since 6 April 2010, you could make a gift of £6,000 now with no inheritance tax implications. The new tax year begins on 6 April 2012 and then another exemption will be available; you can therefore make a further gift of £3,000 after 6 April.
You can make gifts up to £250 to as many people as you like in any tax year without any inheritance tax consequences. You could, for example, give £250 to any children or grandchildren now (and again after 6 April 2012) with no inheritance tax consequences.
Please note that you cannot combine this small gifts exemption with any other exemption (e.g. you cannot combine £250 with the £3,000 annual exemption and give someone £3,250).
Regular gifts can be for life, not just for Christmas
Any gifts you make out of your after-tax income (but not your capital) are exempt from inheritance tax if it can be shown that you have enough income to cover the gifts and your usual daily expenditure without having to resort to using up your capital.
Gifts from surplus income must be shown to be part of your regular expenditure and could therefore cover a monthly direct debit payment e.g. to a child or, alternatively, regular premiums on a life insurance policy (for you or for someone else). If you wish to make regular gifts from your surplus income then we recommend that you keep a schedule of your (after tax) income and expenditure, including gifts, that can be shown to the Revenue after your death if required.
As long at it can be shown that the gift is made out of income and is part of a pattern or intended pattern of giving, there is no limit to the amount which qualifies for the exemption. Where circumstances permit, therefore, this can be a very useful tax free way of giving.
Further exemptions for lifetime giving are available. If you would like further advice or assistance then please speak with your usual contact at Wansbroughs.
Finally, we take this opportunity to wish you a Merry Christmas and a prosperous 2012