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A guide to gifting money.

Written by
Connor Mullins
Time to read
6 minutes, 27 seconds

Gifting money to loved ones can be an effective way to pass on your wealth, whether you want to help your child get onto the property ladder, boost your grandchildren’s savings account, or support a friend in need.

Legally, you can gift a family member as much as you wish, however, it’s important to bear in mind that there are rules on gifting and Inheritance Tax which apply to monetary gifts, especially if the amount exceeds your annual exemption.

In this article, you’ll learn about gifting money in the UK, including what counts as a gift, giving cash gifts to children and how you can gift tax free.

What counts as a gift?

A gift is anything of value that you give to someone else, including money, property, and physical possessions. It could also include stocks listed on the London Stock Exchange and unlisted shares you held for less than two years before your death.

It must reduce the value of the estate and you must include any loss incurred as part of the gift.

It’s important to note a gift can include any money you lose when you sell something for less than it’s worth. If you sell your house to your child for less than its market value, the difference in value counts as a gift.*

​​Anything you leave in your will does not count as a gift but is part of your estate, the value of which will be used to work out if Inheritance Tax needs to be paid.

How can you gift tax free?

Each tax year, you can give away some money or possessions free of Inheritance Tax. How much is tax free depends on which allowances you use.

You’re allowed to roll over any unused gift allowance to the following tax year, but only for one tax year. It’s important to understand the different gifting scenarios as money you directly give to anyone other than your spouse or a charity could be subject to gift tax, which can be up to 40%.

You can give money to loved ones without normally paying tax when:

  • You give the gift at least seven years before you die
  • You give the gift to your spouse, civil partner, or a registered UK charity
  • The total amount is less than the annual allowance of £3,000
  • The gift is a small cash payment of less than £250

You can also give cash gifts of up to £1,000 to anyone for weddings or civil partnerships. This increases if you are a close relative as follows:

  • if you’re the parent, you can give a child up to £5,000 tax-free
  • if you’re the grandparent you can give up to £2,500 tax-free

Gifts to your spouse or civil partner.

Your wife, husband or civil partner are considered exempt beneficiaries. You can give them as much as you like in your lifetime, as long as they live in the UK permanently and are legally married or in a civil partnership with you.

There’s also no Inheritance Tax to pay on any gifts you give to charities. Gifts to an unmarried partner may trigger Inheritance Tax rules. Speak to a financial adviser for professional expertise that is best suited to your unique circumstances.

Giving cash gifts to children and other family members.

When it comes to children, it’s not only how much money you can give them, but also when you give it that matters. You can give both your children and a family member money up to the annual exemption and it will not be liable for tax.

If you give cash gifts to your children of more than £3,000 in any one tax year, you’ll need to live for more than seven years after making your gift to avoid it being included in the value of your estate (and therefore potentially liable to Inheritance Tax).

*Rules on gifting tax free sourced from: https://www.gov.uk/inheritance-tax/gifts

The above information is correct for the 2023/24 tax year.

Leaving your house to your children.

You can also leave your residential home to your children. However, you need to be mindful of Inheritance Tax and when it applies. As a starting point, the ‘nil-rate band’ (NRB) is the amount up to which an estate has no Inheritance Tax to pay. Each individual has their own nil-rate band which is £325,000 for 2023/24.

There is also an additional threshold called the ‘residence nil-rate band’ (RNRB). This is available when eligible residential property is left to direct descendants and provides an extra tax-free allowance of up to £175,000 on top of the £325,000 nil-rate band.

Taking both bands together means that you have a potential tax-free threshold of up to £500,000 – or up to £1 million as a married couple (including civil partners) – that you can leave to your child tax-free.

The ‘main residence nil-rate band’ cannot be used with lifetime gifts.

*Rates sourced from gov.uk: https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band

The above information is correct for the 2023/24 tax year. The inheritance tax threshold will remain frozen at £325,000 until 2027/2028.

Gifts that benefit you. 

If you give something away but still benefit from it, it will still count towards the value of your estate.

A gift with reservation occurs where, for example, a parent gifts their home to their children and continues to live in their property, or where someone gives away a caravan but still uses it for free for their holidays.

A ‘potentially exempt transfer’ is a lifetime gift which is potentially free of Inheritance Tax.

It’s a transfer of anything that has value, such as possessions, property, or money, and becomes fully exempt if you live for seven years after making the gift. If the circumstance arises where there are more than three years between the date of the gift and the date of death, then taper relief will reduce the tax payable.

What is Inheritance Tax ‘taper relief’?

It is a tax relief that is applicable when Inheritance Tax is due on a gift that is made within seven years of a person’s death.

No tax is due on any gifts you give if you live for seven years after giving them – unless the gift is part of a trust. This is known as the seven-year rule. Gifts given three to seven years before your death are taxed on a sliding scale known as ‘taper relief’.

The only instance in which taper relief will apply is if the total value of gifts made in the seven years before you die is over the £325,000 tax-free threshold.

Years between gift and death                                 Rate of tax on the gift

3 to 4 years                                                                 32%

4 to 5 years                                                                 24%

5 to 6 years                                                                 16%

6 to 7 years                                                                 8%

7 or more                                                                    0%

*The above tax information was sourced from: https://www.gov.uk/inheritance-tax/gifts

The above information is correct for the 2023/24 tax year. The inheritance tax threshold will remain frozen at £325,000 until 2027/2028.

If you’re a True Potential client and have any queries on gifting money, you can call our Relationship Management team on 0191 500 9164. They’re available 7am – 8pm weekdays and 8am – 12pm on Saturdays.

If you’re not a client you can call one of our experts on 0191 625 0350 to learn more.

 

The Financial Conduct Authority do not regulate, Will Writing, Tax Advice and Estate Planning. The guidance and/or advice contained within the website are subject to the UK regulatory regime and is therefore primarily targeted at customers in the UK.

Tax is subject to an individual’s personal circumstances, and tax rules can change at any time. This blog is not a recommendation or personal financial advice.

 

*Scenario referenced from gov.uk: https://www.gov.uk/inheritance-tax/gifts#:~:text=A%20gift%20can%20also%20include,is%20part%20of%20your%20estate.

 

 

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