If you are looking to avoid plastic toys and gift vouchers this year, a financial Christmas gift could be a good alternative for your child or grandchild.
A financial gift means you can invest in their future and make a lasting difference, whether that money helps to buy their first car, pay for education or a deposit on a home.
However, if you are considering giving a financial Christmas gift to a child or grandchild this year, it is important to first understand the tax implications. In this blog we outline a few key taxation areas you should consider if you are intending to give a financial gift this festive season.
IHT implications on a financial gift
As with any financial gift you make, your first consideration should be around the inheritance tax implications. This will generally not be an issue if all your gifts to a single child total no more than £250 in the same tax year. This is also the case if the total yearly gifting figure does not exceed £3,000.
You will also be able to mitigate the impact of IHT if the gift is regular, out of income and does not reduce your standard of living. Finally, any financial Christmas gift will be free of inheritance tax if you survive seven years after making the gift.
As with any financial decision, it is prudent you speak with a planner before making a financial gift as they can assess your individual circumstances and gifting goals.
Income tax on financial gifts
The next tax to bear in mind when making a financial Christmas gift is income tax. If you are a parent making a gift to your child who is under the age of 18 and unmarried, and the income the gift generates in a tax year exceeds £100, then that income is taxable as if it were yours.
When interest rates were closer to zero, this £100 per parent, per child ceiling was somewhat academic, but with higher interest rates it can make an impact. For example, if you gift £2,500 which is earning 4.5%, the entire £112.50 of interest received would be taxed as if it were your own under the ‘parental settlement’ rules. This could mean tax of up to 45% if you are an additional rate taxpayer.
Benefits of a Junior ISA
One way to mitigate the impact of this kind of taxation is to utilise the tax benefits of a Junior ISA (JISA). You can make any gift up to £9,000 total (in 2023/24) into a JISA for a child. JISA income, whether interest or dividends, is excluded from UK income tax.
It’s helpful to know that the £100 rule only applies to parental gifts, so if you are a grandparent or other relative, any income generated by gifts is the child’s own for tax purposes. Every child has their own personal allowance of £12,570 and could also be entitled to the starting rate for savings (up to £5,000) and Personal Savings Allowance (up to £1,000). This means that if all income received is through interest (not dividends or earnings) then there would usually be no tax to pay on the first £18,570 of interest received. If it is dividends being received, then it is just the personal allowance and dividend allowance (£500 from 2024/25 onwards) that can be used. If the income exceeds these allowances, then a tax bill will come into play.
Capital gains tax (CGT) on financial gifts
Capital Gains Tax may also be payable if you are planning to gift any investment funds, shares or property that you already own this Christmas. As these gifts typically include trusts, it is advisable you consult a professional financial planner to help you navigate this.
It is important to keep in mind that CGT could become payable by you when you first make the gift if the value has increased during your ownership. If the value continues to rise after making the gift, the child could become liable to CGT at a later date.
Every individual has £6,000 annual CGT exemption in 2023/24, reducing to £3,000 from 2024/25 onwards that can be used to offset any CGT liability. At the time of writing, there is no corresponding CGT anti-avoidance rule to the £100 parental gift income tax rule. Again, JISAs can be useful here as any gains within a JISA are free of CGT.
Consult with your planner
If you are looking to give a financial gift this Christmas or for any other occasion to a child or grandchild, it is prudent that you speak with a Chartered Financial Planner who can assess your personal financial situation and gifting goals.
If you would like to reach out to our team of financial planners, please do get in touch.
This communication does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs.