Tax: Gifts aren't just for Christmas
Donald Drysdale looks back at work by the Office of Tax Simplification and summarises some of the tax incentives for giving.
The traditions of giving Christmas presents at this magical time of year and the roles of Father Christmas, St Nicholas and Santa Claus vary from country to country.
Here in Britain our professional tax press carries many seasonal articles – often concentrating on the treatment of business entertaining and gifts. However, the UK tax regime is pervaded by all manner of reliefs to encourage giving throughout the year.
It isn’t feasible to provide an exhaustive list of such reliefs in this short article. In the paragraphs below I’ve drawn on the updated list of all tax reliefs as at July 2014 (published by the Office of Tax Simplification.
Although there is much scope for claiming beneficial tax treatment for gifts, please note that all the reliefs are subject to detailed statutory rules.
Where annual parties or functions are provided for employees, not only at Christmas but at any time, these may be exempt from income tax and national insurance contributions (NIC) where the annual cumulative cost doesn’t exceed £150 per head for those attending.
Entertainment of employees by a third party may also be exempt from income tax and NIC. Gifts to employees from third parties may be exempt too, where the cost incurred by the third party on the employee does not exceed £250 a year.
From 6 April 2016, a new statutory exemption for trivial benefits came into effect. A benefit costing no more than £50 may be exempt from income tax and NIC. Between a close company and a director or office holder, the exemption is capped at £300 per tax year.
As a general rule, costs of entertainment and gifts are not deductible in computing taxable business profits.
However, there are some exceptions where the cost may be deducted:
- Entertainment or gifts for employees, if not incidental to entertainment or gifts for third parties;
- Entertaining where incurred in the normal course of a trade of providing entertainment or hospitality; and
- Certain gifts costing no more than £50 per donee per annum if incorporating a conspicuous advertisement.
Gift Aid relief may be claimed for monetary donations by individuals to charities and Community Amateur Sports Clubs (CASCs). The charity or CASC claims back basic rate income tax on the grossed up amount; higher-rate and additional-rate taxpayers may claim further relief.
Corporation tax (CT) relief may be claimed on qualifying payments by companies to charities and CASCs. This is often called ‘corporate Gift Aid’. Where a company is wholly owned by a charity or charities, its monetary donations to charity made within nine months after the year end may be deducted.
Relief from income tax or CT may be claimed for gifts of shares, land or other assets to charities and CASCs. Where a business gives trading stock or a company gives medical supplies and equipment to a charity or CASC, the value does not need to be recognised as income. Capital gains on gifts of assets to charities, and on gifts of land to housing associations and registered social landlords, may be exempt from tax. For income tax and CT the capital allowance disposal value of plant and machinery gifted to a charity or CASC is nil.
Inheritance tax (IHT) is levied on transfers of value. Small gifts, where they amount to less than £250 to the same person in a tax year, are exempt from IHT.
In addition, gifts totalling £3,000 in a tax year are exempt. If all or part of this annual exemption remains unused, the balance can be carried forward only one year but used only after the exemption for that later year.
Exemption from IHT is available for gifts in consideration of a marriage or civil partnership. This exemption applies to gifts by parents of either party up to £5,000 each, by certain other relatives up to £2,500 each, and by any other person of up to £1,000.
Gifts to a spouse or civil partner are exempt from IHT, subject to a limit where the donee is non-UK domiciled.
IHT thresholds and gift provisions have not kept pace with inflation. For example, the nil rate band was set at £325,000 on 6 April 2009 and is to remain at that level until 5 April 2021. The exemptions for monetary gifts on the occasion of marriage or civil partnerships have not been increased since 1975, and the annual exemption has been £3,000 since 1981.
Normal expenditure gifts out of income may be exempt from IHT where the donor is left with sufficient income to maintain their usual standard of living – although keeping records to evidence this can be difficult.
Most non-exempt lifetime gifts are potentially exempt transfers (PETs) attracting no IHT charge when made, and become wholly exempt on the donor surviving seven years after the PET. The IHT rate is tapered for PETs made between three and seven years before death.
Exemptions from IHT are available for gifts to certain national heritage bodies, national institutions, universities, government departments, health service bodies, local authorities, and libraries. Gifts to charities, property held on trust for charitable purposes, and gifts to major political parties are also exempt. Gifts of land to UK housing associations and registered social landlords are also exempt from IHT.
Where 10% or more of a deceased person's net estate is bequeathed to charities or CASCs, the IHT rate on the remaining estate may be reduced from 40% to 36%.
Capital gains tax
A gift of an asset is treated as a disposal by the donor for deemed consideration equal to market value and capital gains tax (CGT) may be payable. However, gifts or any other transactions between spouses or civil partners are exempt from CGT.
If a gift of an asset is immediately chargeable to inheritance tax, the resulting gain can be deferred and charged to CGT when the donee disposes of the asset. Similarly, gains on gifts of qualifying business assets may be deferred and charged to CGT when the recipient disposes of them. Where neither of these gift reliefs is available, CGT may be paid by instalments over 10 years.
Gifts of pre-eminent property to the nation may be exempt from CGT (as well as income tax, CT and IHT). Gifts of certain heritage works of art may be exempt from CGT if undertakings are given that they will be on public display. Gifts, or sales by private treaty, of heritage works of art to specified collections or in lieu of IHT may be exempt from CGT.
SDLT and LBTT
Gifts of interests in land where there is no chargeable consideration are exempt from stamp duty land tax (SDLT) or, in Scotland, land and buildings transaction tax (LBTT).
Happy giving! And finally, I’d like to join with Charlotte Barbour and her tax team at ICAS in wishing all our readers a very Happy Christmas and all best wishes for 2017.
Article supplied by Taxing Words Ltd