Christmas is a time for giving presents to our family and friends. It is also a time to think of those worse off than ourselves and to support our chosen charities. 

There are also tax implications to consider when making gifts, and it is a good time for those of us in later life to think about the impact of inheritance tax. 

You may think you can give whatever you like to your spouse or civil partner tax free, but this is not always the case. There is a spouse exemption for inheritance tax and capital gains tax, but not for stamp duty nor income tax. 

Suppose you want to give your spouse a share in a property. If they also take on a share of the mortgage then they could be potentially caught for stamp duty. 

You can give shares to your spouse tax free but that does not necessarily apply to all investments. For example, gifts of securities such as gilts, investment bonds issued by banks and loan notes issued by companies can be caught by the “accrued income scheme”. 

There is a small holdings exemption but confusingly that is based on the nominal value of your holdings, not on the amount transferred. It is something easily forgotten when completing your tax return. I have even found some tax inspectors confused by this rule (more information can be found at HM Revenue & Customs guidance note HS343). There is no logic to this rule but the trap remains nevertheless. Incidentally, when I refer to bonds, I do not mean single premium insurance policies, often referred to as bonds. 

That is not the only confusing rule. I said there is an inheritance tax spouse exemption, but that is not always correct. The exemption is restricted if the recipient is domiciled outside the UK.

Christmas gifts to family and friends are unlikely to have tax implications but there are traps for the unwary if larger gifts are being considered. Your spouse aside, a gift is treated for capital gains tax purposes as a disposal at market value. 

That isn’t a problem for a cash gift but a gift of shares, for example, could trigger a capital gains tax bill if all gains in the year exceed your annual exemption, currently £12,300. 

On the other hand, this can be a useful way of saving capital gains tax because you could give shares which use up your own annual exemption, but in doing so pass them on to other family members at their current market value, saving tax when they are sold in future.

Relief from capital gains tax can apply for a gift of shares in a private company – you can find out more about this in the HMRC manuals at CG66880 but the rules are complicated and professional advice should be taken.

Beat inheritance tax this Christmas

There is no doubt that one of the easiest ways of saving inheritance tax is to make lifetime gifts. With limited exceptions, after seven years they are no longer counted in IHT calculations. 

If you are unsure about making a direct gift you could consider a gift into trust. Take care that in doing so you do not exceed your IHT “nil-rate” band, currently £325,000, because above this you could trigger a lifetime IHT charge at 20pc. 

You and your spouse or civil partner are treated separately so could together transfer up to £650,000. This is in addition to the annual £3,000 exemption allowed and the £250 small gifts exemption. 

Remember also that gifts of any amount are free of IHT as long as they are regular, out of income and do not reduce your standard of living. With any gift be careful that you do not continue to benefit from the asset given or it will remain part of your IHT estate. In particular do not fall into the trap of giving away a property if you continue to live in it.   

We are a generous nation. According to the Charities Aid Foundation we gave £11.3 billion to charity last year, up almost 7pc despite the pandemic. I set out the ways you can help charities in an earlier article. I also warned about traps for the unwary, but some are worth repeating.

1. Make sure that you have paid enough tax to cover any gift aid payments because HMRC can recover any shortfall from you.
2. Tax paid can include capital gains tax as well as income tax
3. Couples should ensure that the gift is made by the one at the highest tax rate, but ensure you claim the higher rate relief in your tax return
4. You can carry back a gift aid payment but the election must be made in the first return you file.

Tax Hacks is written by Mike Warburton, previously a tax director with accountants Grant Thornton, and is published twice a month on Tuesdays. You can email Mike on taxhacks@telegraph.co.uk