small gift clarification

May I please request clarification on the following sentence in the HMRC guidelines on IHT: "Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax." Does this mean that you can give someone birthday and Christmas gifts in addition to an exempt gift of £250 or some other sum from your £3000 exemption, with no IHT implications? And if so, is there a limit to the value of the birthday and Christmas gifts? Thank you in anticipation.

Hi,

There is an annual exemption, that allows an individual to give away a total of £3000 worth of gifts each tax year without them being added to their estate.  

You can give gifts or money up to £3,000 to one person or split the £3,000 between several people.  

You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person. You can see further guidance here:

How Inheritance Tax works: thresholds, rules and allowances

Thank you.
 

Thank you for your response. The guidance stipulates: "Small gift allowance You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person. Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax." (i) Does this specific reference to birthday and Christmas gifts mean that such gifts may be given in addition to any gifts given under the the aforementioned £3k/£250 allowances, with no IHT implications? (ii) The reference to birthday and Christmas gifts comes under the "small gift allowance" subheading: does that mean that each birthday/Christmas gift cannot exceed £250, without IHT implications? Thank you in anticipation.

Hi snappy,

Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax, so will not affect the £250.00 small gift allowance.  

The guidance here: How Inheritance Tax works: thresholds, rules and allowances

This guidance does not state a maximum amount for a Christmas or Birthday gift, so long as it comes from your regular income, it is exempt from Inheritance Tax.

Thank you. 
 

However, based on the information you provided, if a gift is given from your regular income and it is a [link removed ] Christmas gift, it would be exempt from Inheritance Tax in the UK. The £250 small gift allowance refers to gifts that are not part of your regular income and can be given to any individual per tax year without incurring Inheritance Tax. However, there is no specific maximum amount mentioned for birthday or Christmas gifts given from regular income in the guidance you mentioned. It's always a good idea to consult with a tax professional or refer to the official HM Revenue & Customs (HMRC) guidance for the most up-to-date and accurate information regarding Inheritance Tax exemptions and allowances.

Hi, when “regular income” is referred to in these examples and in the IHT guidance, do dividend payments from investments (ie. Not the capital investments themselves; just the dividends paid) count as regular income? Or does it have to be the same amount for example? Or is any income paid into a current account deemed “regular income” if the investments are held long term? Just in the sense that the capital investment value can go up and down, therefore dividend payments are likely t fluctuate, and worse case scenario not generate income on the odd month… grateful for clarification. Thanks

I have been told that hmrc will count monetary gifts from friends as income even though I have clearly stated they are gifts. Please elaborate and clarify for me. Many thanks

Hi HKlady,
An individual's income can be made up of many things and that may also include dividend payments from investments.  
It does not have to be the same amount.
Dividend payments in a tax year can fluctuate, so may pay out more in one year and less in another.
Share holdings may increase or reduce and this can also affect the dividends paid in a tax year.  
Each tax year is looked a separately.
Thank you. 
 

Hi,
There are no income tax implications on the receipt of a cash gift unless the cash gift generates interest or dividends. These would then potentially be subject to tax.
Further guidance can be found here:
Tax on savings interest
Tax on dividends
Thank you.

HMRC Admin 25 response above, from 8 months ago (on 30/03/2023 at 3.29pm) says: "This guidance does not state a maximum amount for a Christmas or Birthday gift, so long as it comes from your regular income, it is exempt from Inheritance Tax." Is this regular income for the month, or year in which the gift is made? Many thanks

Hi,

It is your annual income. You will need to be able to show that the gift came from your annual income.

Thank you.

I wish that I knew this years ago! Thanks to Snappy for raising the matter and to HMRC for the clarification. Presumably "annual (or regular) income" means gross taxable income - not income after tax? Or can income from ISAs and VCTs be included? Presumably HMRC would not be happy were someone with, say, an income of £50K, to give £45K away in birthday and Christmas presents and sell investments to pay for their necessary life style And just to clarify: Say my income is £100,000 a year. I need £30,000 to live on. I can then give away £70,000 in birthday and Christmas presents? (These figures are fictitious!) No doubt you will wish to recommend that records of any such (all?) gifts are kept?

A further thought: when gifts are stated to be for "Christmas or birthday", How close to such events do the gifts have to be made? Back in the summer, a friend in urgent need of medical finance asked me to give her her presents several months in advance of the events themselves.

Hi Terence Sharman-Crawford,
We can confirm that there is no tax due on the giving/receiving of a cash gift.
What you do with your income, after tax deducted, is up to you.
You would only need to keep records in the event of possible Inheritance Tax as payments made within 7 years of you passing are counted as part of your estate.
Thank you. 

But in the context of this thread does "annual (or regular) income" mean gross taxable income - or income after tax? And can income from ISAs and VCTs be included? And how close to the actual events should Birthday and Christmas presents be made? (I would have thought that at least anytime in December would have been appropriate for the latter, though some organisations and individuals have been marking the occasion for the last month and more!)

No it doesn't mean gross taxable income. In short the gifts must be normal expenditure, it must be from income and you can't dip into capital to meet living costs (because you used your income to make the gifts), you must leave yourself with sufficient income to meet your living expenses. The following page might be useful as it provides an explanation of each condition, including explaining what income is. https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14231

I have a couple of queries regarding the above Small gifts allowance scenario: 2 cash gifts have been given to the same person in 1 tax year, each gift is for £150, so the total for that year to this individual is £300. Assuming they annual allowance (3k) has already been used for the year and the gifts are not out of surplus income. How is this handled? Is the first gift of £150 tax free under small gift allowance and the next £150 taxable, or is the second gift split so £100 of it is tax free and the remaining £50 is taxable? Or are both taxable as the combined is over £300? IHT403 - gifts out of surplus income: • The estate has a large stocks and shares ISA portfolio, generating dividends and also showing growth as the stock market rises over the years. At any time, does the ISA investments growth count as income before it is classified as capital? If so, what time frame is it counted as income? • If the ISA dividends are reinvested, is that still classed as income for the year if nothing is withdrawn from the ISA account. Many thanks in advance

Thanks to Bella Boo for their reply and for another HMRC link for me to explore. Over the weekend I discovered this advice: "Your [surplus] income is comprised of all income, including non-taxable income such as ISA interest and/or dividends and some benefits in addition to premium bond winnings," according to one expert: https://whitingsllp.co.uk/gifts-out-of-surplus-income-exemption/. And presumably VCT income as well, whether it's taken as cash or re-invested? Yet another HMRC webpage (and I managed to lose the link to it) cites birthday and Christmas presents as examples of regular gifts made out of income, but I haven't found anything that suggests such gifts to the same person have to be regular, ie every year. Apart from any other comments they may care to make, my only other outstanding question (from three days ago) for HMRC Admin is "how close to the actual events should Birthday and Christmas presents be made?" (I have long lamented the £3,000 annual gift allowance remaining the same for so long. IIRC, at least 25 years ago my parents were each dutifully giving me £1,500 for my birthday and for Christmas - obviously they were unaware of the small print that we're discussing in this thread. What a pity that this amount has not been increased in line with inflation.)

Hi,
The small gifts allowance allows as many gifts of up to £250 per person from your regular income.  
Income is not defined in the IHTA84 but should be determined for each year in accordance with normal accountancy rules.
It is not necessarily the same as income for income tax purposes.
Income is the net income after payment of income tax.  Please have a look at: IHTM14250 for more detail (Income is not defined in the IHTA84 but should be determined for each year in accordance with normal accountancy rules. It is not necessarily the same as income for income tax purposes. Income is the net income after payment of income tax.
Thank you.

Hi Mr Apple,
We cannot comment on scenarios, only provide general information / guidance in this forum.
For an answer to a detailed question of this nature, you would need to contact our Self Assesment helpline on 0300 200 3310, or seek professional advice.
Thank you.