Don’t let Christmas gifts become New Year nightmares
Whatever gifts you’re thinking of putting under the Christmas tree this year make sure you’re not going to regret them later.
Giving is good for us. It makes us feel better about ourselves but it’s easy to get a bit carried away.
Not all gifts are as straight forward as they might seem. If you’re thinking of being extra generous this year make sure you’re aware of all the implications first.
Are you giving more than you realise?
There are some assets that carry particular rights or responsibilities with them.
Shares in a family company for example may carry voting or dividend rights. Owners of family businesses need to think very carefully about the consequences of giving away shares in the company. Could a gift of the shares weaken the position of the other shareholders?
In a family company there can sometimes be tensions that are usually kept in check by finely balancing voting and other rights. Could the gift upset that fine balance?
Gifts of money to buy property
Giving someone money to help them buy a property is a very kind gesture but it can be a problematic area.
It’s quite common these days for the ‘Bank of Mum and Dad’ to fund adult children in buying their first home.
If the children later make decisions about relationships or lifestyle their parents don’t like, the parents might begin to regret their generosity and want to treat the gift as a loan instead.
It’s also increasingly more common for older people to offer to sell their own home and give the sale proceeds to another family member to use to help buy a property where they can all live together.
Without proper legal safeguards being put in place from the outset the arrangement can go disastrously wrong. Everything should be carefully documented and an exit plan agreed in case things turn sour. Everyone in the arrangement should have independent legal and financial advice before the arrangement is concluded.
Some gifts are less welcome than others. It’s important to think about the person (or organisation) you’re giving the gift to. Is the gift going to have any unpleasant consequences for them?
- Is the person receiving the gift going to have to pay taxes as a result?
- or could the gift make them ineligible to receive certain state benefits that in the longer run are more important to them?
Your gifts could be more expensive than you think
Some types of gifts you might want to make need legal documents for the gifts to pass out of your ownership. If the documents are not prepared properly the gift could be ineffective. Gifts of land, shares, vehicles etc. all need legal documents to complete the gift. That can add extra cost to the gift. Make sure you budget for any additional costs.
Loss of value to your estate
If you give some types of assets away such as shares or part of a property, you might be creating a tax issue for yourself or your family later. Inheritance tax is calculated on the reduction in value of the estate of the person giving away the asset, rather than on the value of the thing given away.
If a business owner has 51% of the shares in a private company and decides to give 2% of those shares away. The business owner stops having a majority shareholding and loses outright control over the company. So the loss to him or her is greater than the value of the 2% shares given away.
Continuing to benefit from gifts
If you decide that you want to continue to get some use or benefit from the thing you give away HMRC might consider the asset should be treated for taxation purposes as if it’s still part of your estate when you die. It’s called a ‘gift with reservation’.
Using trusts as an alternative
Making a gift via a trust can be a way of protecting the asset you want to give away and retaining some control over what happens to it in the longer term. You can transfer the asset you want to give away to trustees who hold the asset in a trust fund you set up. Depending on the trust arrangement you use, gifts can be protected from landing in the hands of people you don’t want to benefit or being used for a purpose you don’t agree with.
Keep the Christmas cheer going and avoid New Year nasty shocks by making sure your gift is genuinely a good thing.