Gifting money to relatives can bring enormous joy as well as some security to them. However, you may be worried about tax implications and whether there are any limits on what you can give. This is a clear and concise guide on gifting money to family members and relatives.
The basic rules of gifting money to relatives
Gifting money to family is often simple and tax free but it does depend on who you give to and how much you give. For example, you are not required to pay any tax (including Inheritance Tax) on any small financial gifts, such as birthday and Christmas presents. Such gifts are known as exempted gifts.
You can also give unlimited financial gifts to your spouse or civil partner. These financial gifts can be given as often as you like, without any tax implication, as long as they live in the UK.
There are also some other general rules about gifting money to relatives. The most important of these rules concerns time and amount. It’s useful to think of the value of such gifts as being part of your larger estate because for tax purposes this is exactly what they are.
Therefore, if you give away more than £325,000 in gifts in the 7 years leading up to your death (including to your estate beneficiaries on your death), then the recipients will be charged Inheritance Tax.
However, there are certain exemptions. These can apply to gifting money to children, gifting money to grandchildren and gifting money to other relatives. The exemptions differ, so you need to consider the relationship to the recipient and circumstances of each financial gift.
Exempted financial gifts
You may, in each tax year, give away (to anyone regardless of relationship to you) up to £3000 in each tax year. These gifts aren’t added to your estate and so no Inheritance Tax will be due – even if you die within 7 years. This £3000 limit is known as your annual exemption.
If you don’t use your full annual exemption in one tax year you can carry over the remaining allowance to the next tax year. You cannot carry it over for more than one year.
There are some additional exemptions for gifting money to relatives.
- Wedding and civil ceremony gifts: You may give anyone, regardless of their relationship to you, £1000 per person as a wedding or civil ceremony gift. For a grandchild you may give them £2500 and for a child you may give them £5000.
- Gifts from surplus income: You may give ‘normal’ gifts, such as for Christmas or birthday, out of your income as long as it doesn’t negatively affect your standard of living.
- Financial support for dependents and other relatives: You can make payments to a child under 18, or an elderly relative, to help them meet their living costs.
It is possible to use these exemptions more than once, including on the same person, in the same tax year. For example, you could gift your adult child Christmas, birthday and wedding gifts within the same year.
Understanding smaller gifts
Small monetary gifts are determined to be those under £250 per person. You can give as many of these gifts to relatives as you like in each tax year on the proviso that you haven’t used another exemption on them within that same tax year.
The 7 year rule isn’t straightforward
Going back to the 7 year rule for Inheritance Tax, this is where confusion regarding gifts to family members usually arises.
Technically, there is no limit on the amount you wish to gift someone. The tax liability comes in the form of Inheritance Tax only. For example, if you gift your son £10,000 then this is a gift, not income, and they won’t be required to pay income tax on it.
However, if you die within 7 years of the gift, this is when tax implications do become relevant – in the form of Inheritance Tax.
You need to be aware of this because Inheritance Tax is charged at 40% on gifts given in the three years prior to your death and on a sliding scale (known as taper relief) when the total estate is valued at over £325,000. Taking the example above, this means that your son could be required to pay Inheritance Tax on that £10,000 if you die within 7 years of when it was given.
This can obviously become a problem for your relative which you will want to avoid. It can also mean that, without careful planning, you may reach the £325,000 Inheritance Tax threshold in financial gifts before your beneficiaries receive anything from your estate.
Inheritance Tax is a complicated area. There are other aspects of it which can affect whether it will be due on financial gifts. For example, if you give more than 10% of your estate to charity, Inheritance Tax is only payable at 36% even over the £325,000 threshold. Therefore, it is vital to seek the advice of an independent financial advisor.
So is it possible to gift money to relatives without paying tax?
Tax free gifting money to relatives
The simplest way to give money to your relatives without any tax implications is to do so more than 7 years before you die. Without a crystal ball this obviously has its limits!
You can also gift unlimited amounts to your spouse, civil partner or registered UK charity. And there is the annual exemption of £3000.
A simple way to gift money to relatives is to pay it directly in to their account. You’ll want to give careful consideration about which account it is paid in to as some accounts are more tax efficient than others. For example, when gifting money to children under 18 then it can be sensible to pay the gift in to a Junior ISA.
Regular payments from your income
Gifts which are made as regular payments from your taxed income (rather than from your savings) are exempt from tax. This can be an ideal way to consider gifting money to relatives.
The obvious examples of such regular payments are regular maintenance payments to children under 18 or adult children in full time education. However, they can include monthly or regular payments to anyone, meaning they can be used for gifting money to relatives, however close or distant the relationship.
The basic rule of thumb is that you must be able to maintain your current standard of living after making each payment. It’s vital to keep accurate records of such payments so that they are clearly exempted from Inheritance Tax.
Giving money to relatives with confidence
Tax rules and allowances can and do change over time. The rules are also complex and depend on your individual circumstances. We recommend that you seek advice from an independent financial advisor so that you can gift money to relatives with confidence.