Christmas is a time for giving, and there is no better gift for your loved ones than contributing to their financial future. And with a renewed focus on inheritance tax thanks to Chancellor Reeves October 2024 Budget, this is the perfect time of year to think about how your Christmas presents can benefit your family, and help you minimise any future tax bill at the same time.
Research shows that 36% of presents given to children on Christmas Day won’t be played with beyond Boxing Day, with the average child consigning four of their festive gifts to the toybox before the turkey is even cold. Even without taking into account the environmental implications of such waste, most of us would prefer the money we spend on presents to have a rather longer impact than that.
Christmas is the ideal time to make use of the allowances which the Chancellor, with uncharacteristic generosity, gives each of us every year when it comes to giving away our accumulated wealth.
‘Exempt giving’ allows everybody to give away up to £3,000 every year with no strings attached – there is no necessity to live for a certain number of years after the gift is made, for example. That £3,000 can be given to just one recipient or to more than one, so it could be split between your children or grandchildren, for example.
In addition, you can give any number of gifts of up to £250 per recipient (but not to anyone who has benefitted from your £3,000 allowance). So, for example, a grandparent with two children and six grandchildren could give £1,500 to each child (using their £3,000 allowance), and then give an extra £250 to each grandchild – all completely free of tax.
Few people realise it, but parents and legal guardians can open a pension for a child from the moment of birth onwards. Once it is set up, others - for example, grandparents - can contribute a maximum of £3,600 a year into it. What's more that maximum contribution will actually cost £2,880, because the taxman will make up the rest.
And here's the thing; if you were to make that contribution every year for the first 18 years of a child's life, it would create a pension pot which could well be worth hundreds of thousands of pounds by the time the child retires, even if they don't contribute anything else to it their lifetime.
What's more, they can't touch the money until they are 57 (under current legislation), so there can be no temptation to embark on the kind of reckless spending that, let's face it, most of us would have undertaken had we received a significant windfall at the age of 18.
Importantly, these gifts must come from income such as employment, property, pensions, interest and dividends, and not from capital assets. HMRC does have rules and regulations to curb the misuse of this concession, so it is a good idea to seek advice before going down this route. But it can be an excellent way of helping younger members of your family without incurring an inheritance tax liability – especially as it seems likely that pensions will fall into the orbit of IHT from April 2027.
Securing your child’s (or grandchild’s) future is the best present you can give them. Today’s young people are facing a financially uncertain world; building a foundation to support them in later life could be the best Christmas present ever.