Chinese New Year and gifting – what’s in your red envelope?

2023 is the Year of the Rabbit.

As millions of people around celebrate the Lunar New Year, Wake Smith private client solicitor Stephanie Chung answers questions on one of the most popular traditions – the gifting of red pockets and how this can be done within the inheritance rules.

This article covers:

• What is a red envelope?
• Gifts exempt from Inheritance Tax
• So what will 2023 bring us?
• Your next move

What is a red envelope

Red envelopes, commonly known Lai See 利是(in Cantonese), or Hong Bao 紅包 (in Mandarin) are monetary gifts given at special occasions – not just at New Year - this includes weddings, a graduation, birthdays or the birth of a baby.

At New Year, red envelopes are usually given out to the younger generation who are normally still in school or unmarried.

The amount in each envelope can vary depending on the occasion and the recipient. It is important to consider how this interacts with the gifting rules for inheritance tax.

Gifts exempt from Inheritance Tax

Some gifts are exempt from Inheritance Tax. You can also use allowances to give tax free gifts – these include £3,000 annual allowance, small gift allowance and gifts from income.

Gifts exempt from Inheritance Tax (IHT) are:

• The first £3,000 given in any Tax year (by each of you individually) - If the previous year’s exemption was not used fully – then, the amount remaining can be carried forward, but only up to £3,000 can be carried forward. In other words, the carry forward is limited to one year.
• Gifts not exceeding £250 can be made to any one person who has not benefited from gifts made as in the above. These gifts are not taken into account in arriving at the £3,000 limit.
• Gifts made from income - Regular gifts (i.e. by standing order) made out of income (after tax) and which would otherwise be saved or spent as disposable cash. Such regular gifts must not affect the person making the gift’s standard of living. There is no fixed minimum period. As they made out of disposable income the amounts and the payees may vary.
• Gifts for the “maintenance education or training” of the Donors child - Obviously these types of gifts can be made until the child attains 18 but also up until “full-time education” or training ends.
• Gifts on marriage - These depend on the relationship of the giver and the recipient.

Potentially Exempt Transfers (PETs):

• These include any gifts of value over the annual exempt amount.
• PET’s during any period of 7 years are added together.
• On the Donor’s death, the value of gifts made within the previous 7 years is first of all set against the Donor’s Nil Rate Band or the balance of it after previous gifts (those immediately subject to IHT).
• If the Nil Rate Band is exceeded, later gifts are taxable at the full IHT (40%) rate as part of the Donor’s Estate.
• Gifts which therefore exceed the annual exempt limit and made within the 7 years before death have to be reported to the Revenue when an Inland Revenue Account is required to be submitted on death.

Potential problems with Potentially Exempt Transfers:

Apart from the 7 year rule explained above you should be aware that if Lifetime Gifts are made then you no longer own the asset.

That also means that if you have a made a gift of property or cash to your children then:

1. should they (be married and) subsequently divorce the value of that asset (if not already dissipated) would be taken into account in any divorce settlement.
2. should they be self-employed and their business fail then the value of the gift could be claimed to offset any debts of the self-employment.

Capital Gains Tax (CGT) and further options:

CGT would be assessed on your children on the sale of your their share in your property (i.e. on the death of the survivor) on the basis that they also own their own properties.

Additional considerations:

Insurance policies - There is a possibility that some types of Policy could be written in Trust.

Ordinarily policy proceeds are payable to the Estate on death. However, after completion of a Declaration of Trust policy monies may become payable to the Trustees of the Policy on production of the Death Certificate.The Trustees would then usually pay the proceeds to the beneficiary stated in a letter of wishes to the trustees.

The Policy monies do not then form part of the Estate as at the date of death the deceased has no beneficial interest in the policies or their proceeds.

So what will 2023 bring us?

The rabbit is the symbol of longevity, peace, and prosperity in Chinese Culture, 2023 is therefore predicted to be a year of hope and harmony – certainly needed after a turbulent few years.

In case you were curious, according to Chinese astrology, those born in the year of the Rabbit are described as “clever, cultured and creative” – does that sound like anyone you know?

Your next move

For further advice on Inheritance Tax and estate planning matters contact Stephanie Chung on 0114 266 6660.

For Wake Smith’s private client services click here

Published 20/01/23