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You may be thinking of taking your family on holiday. But does this count as a gift for inheritance tax purposes?
There is a growing trend for people to make gifts during their lifetime – either to pay for experiences and make memories with their loved ones, or to give money when beneficiaries are most likely to need it.
In many cases, paying for a holiday counts as a gift. But allowances can be used to remove any potential IHT liability further down the line. There is also a grey area over whether you benefited from the holiday yourself, or whether it should be counted as a true gift to others.
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Inheritance tax (IHT) is normally only a consideration if you have an estate worth more £325,000, including property, savings and valuables.
If you’re leaving a family home to a child or grandchild, a further £175,000 allowance is applied through the residence nil-rate band, taking the total to £500,000 that can potentially be passed on before 40% IHT is applied.
Married and civil partnered couples can pass on £1 million in total without IHT becoming an issue (as long as they leave a home to one or more of their descendants).
If your total estate exceeds these allowances then you might want to plan for IHT, which is paid from your estate after death. If you’re giving money or gifts away during your lifetime, it’s worth being aware of IHT gifting rules.
You might imagine that matters of inheritance tax are cut and dried, but in reality, paying for a holiday member for other people is something of a grey area.
While your children are young and dependent – under the age of 18, or older and still in education – family holidays are likely to be exempt from IHT under an exemption for maintaining dependent family members.
But once they become older and independent, then paying for a holiday on their behalf is likely to be seen as a gift, says Jonathan Halberda, specialist financial adviser at Wesleyan Financial Services.
“If you're paying for a holiday that benefits other family members, HMRC would typically view this as a gift. The key is determining the value that goes to others, so if you're travelling too, you'd only count the portion benefiting family members, not your own share.”
Jack Clancy, chartered financial planner at Path Financial, says if you rented a villa abroad for, say, £20,000, it could be argued that it is for your benefit, so it is not a gift. Ideally, you need to be able to demonstrate that you were the primary beneficiary of the entire cost.
But flights for others are not for your benefit, so would be deemed a gift. The same principle applies if you are paying for a cruise – other people’s travel costs and cabins would not be of any direct benefit to you, so would count as a gift.
Another consideration is whether you need assistance, and whether any family member is taking on a caring or supporting role. In that case, paying for them to accompany you could be seen as a legitimate expense rather than a gift.
A financial adviser may be able to give some guidance on how to manage your estate with inheritance tax considerations in mind.
Each person can make gifts totalling up to £3,000 per tax year under the annual exemption. Once you’ve used this year’s allowance, you can then use any unused part of the previous year’s allowance.
Ian Dyall, head of estate planning at wealth manager Evelyn Partners, says a couple could therefore cover £12,000 of the cost of providing a holiday for their family, assuming they’d not made other gifts this year and last year.
“However, if the holiday is a large one-off holiday exceeding these exemptions, then that gift is likely to be seen as a potentially exempt transfer. The gift does not need to be declared at the time it is made, and provided you live for seven years after making the gift it will not be liable to inheritance tax, but if you die within seven years then that gift should be declared by the executors in their submissions to HMRC,” adds Dyall.
You can also give as many gifts as you like of up to £250 per person per year, as long as you had not already used another allowance on them. So if you were taking the extended family on holiday, you might be able to pay for their flights (under £250) or a spa treatment for everyone, for example, without an inheritance tax liability. (You can still give Christmas or birthday gifts to the same people, as long as those are from your regular income.)
If you’ve used up your annual gifting allowances, consider whether you could pay for the holiday out of regular income instead.
A case could be made that you could pay for a family holiday without IHT implications if it qualifies as 'normal expenditure out of income'. This means it's paid from your regular income, not savings or capital. The spending should also be typical of your usual spending pattern and not reduce your standard of living.
"A family holiday you've always funded every year for decades could qualify. But a sudden £20,000 villa when you normally spend £3,000 would likely not,” adds Halberda.
Keep a note of any significant holiday gifts. You do not have to declare gifts to HMRC at the time, but your executor may have to declare it when handling your estate after death.
Keep clear records: the date, amount, who benefited and where the money came from. If you are claiming the exemption for regular gifts out of income, your records should ideally be able to show that demonstrate the gift was paid out of income and not capital, and that you didn’t have to reduce your standard of living as a result of the gift. We explain more here on how to correctly record financial gifts.
Clancy says: “While you never need to “declare” any gift at the time of making it, it is always sensible to keep records of all gifts, and to note if any of the above exemptions cover it. This will help your executors if you were to pass away within 7 years (which is when any liable gift would become taxable.”
If you are planning a gift such as a big family holiday, consider taking professional advice or doing considerable research on the potential tax implications. That way, you can enjoy your generosity without unwanted tax surprises later.
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