Opening presents is undoubtedly one of the most enjoyable parts of Christmas Day. But if you’ve ever felt just as warm and fuzzy giving gifts as you have when receiving them, there’s a fascinating scientific explanation for why that might be.
Research published on ScienceDirect found that giving to others activates reward and pleasure networks in the brain, which may be due to the fact that choosing to share resources is fundamental for cohesive societies.
In addition to the psychological and societal rewards of giving, there are significant financial benefits as well. Charitable donations often qualify for tax relief, and gifting to loved ones at any time of the year – not just at Christmas – can be a tax-efficient way to share your wealth and reduce potential Inheritance Tax (IHT) liabilities for both you and your beneficiaries.
Read on to discover three financial benefits of giving gifts.
1. Supporting a meaningful cause also allows you to claim tax relief through Gift Aid
If you donate through Gift Aid, registered charities and community amateur sports clubs can claim back the 20% basic rate of Income Tax on your donations.
So, for every £1 you give, your gift is increased by an additional 25p. This allows your donation to provide greater support to a meaningful cause at no extra cost to you.
And, if you’re a higher- or additional-rate taxpayer, there’s an added benefit to Gift Aid, as you can claim back the difference between your highest rate of Income Tax and the basic 20% rate.
So, if you’re a higher-rate taxpayer, you can reclaim an extra 20% (22% or 25% in Scotland), while if you’re an additional-rate taxpayer, you can claim 25% (28% in Scotland), offering both a tax advantage and a greater incentive to give generously.
To reclaim the additional- or higher-rate relief on a charitable gift, you need to complete a self-assessment tax return.
Additionally, if your employer, company, or personal pension provider offers a “payroll giving” or “give as you earn” scheme, you can donate directly to a charity from your wages or pension.
Crucially, these donations are made before tax is deducted from your income, allowing you to benefit from relief based on your marginal rate. This means your contributions cost you less while providing the charity with the full value of your donation.
2. By leaving a gift to charity in your will, you can mitigate your Inheritance Tax liability
While donating to charity during your life can reduce your Income Tax bill, leaving charitable gifts in your will can help mitigate IHT after your death.
Any donation you leave to a registered charity, either during your lifetime or in your will, is exempt from IHT and isn’t considered part of your taxable estate. This not only makes the gift tax-efficient, but it also reduces the overall size of your estate, helping to further limit its IHT liability.
Moreover, if you choose to leave at least 10% of your net estate to charity, the IHT rate on the remaining estate decreases from 40% to 36%. This reduction can result in a significant financial uplift for your beneficiaries, while also allowing you to support causes close to your heart.
So, incorporating charitable giving into your estate plan can be a thoughtful way of both supporting loved ones and contributing to the wider community, while making the most of available tax efficiencies.
3. Giving financial gifts to your family while you’re alive can support your loved ones and reduce the size of your estate
Gifting money to your nearest and dearest while you’re alive not only reduces the value of your taxable estate, but also allows your loved ones to benefit from an inheritance sooner.
For the 2024/25 tax year, you can give up to £3,000 annually without the sum counting towards your estate for IHT purposes. This is known as your “annual exemption”.
Beyond the annual exemption, you can also give individual gifts of up to £250 to as many people as you like, provided they haven’t received any part of your annual exemption.
For larger gifts, you can take advantage of Potentially Exempt Transfers (PETs). These gifts fall outside your estate for IHT purposes if you survive for at least seven years after making them.
Should you pass away within seven years, the gift may still be subject to IHT, though the amount owed is reduced on a sliding scale depending on how much time has elapsed.
Additionally, you can make tax-efficient gifts to celebrate weddings and civil partnerships. These gifts are exempt from IHT, with specific limits based on your relationship to the recipient. You can give up to:
- £5,000 to your children
- £2,500 to your grandchildren
- £1,000 to your friends and other relatives.
So, by taking advantage of these gifting allowances, you can not only support your loved ones throughout their lives but also significantly reduce the taxable value of your estate. Early and thoughtful planning can help ensure your wealth is used to its fullest potential while minimising the tax burden on your beneficiaries.
Get in touch
To find out more about how to strategically give gifts to ensure the optimum benefit for both you and the recipient, get in touch.
Email us at hello@vwmwealth.com or call us on 0141 229 4004.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning, or will writing.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
