Director Can I Gift Money To Family Members?

Tony Dhanjal

gift money to family

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If you want to gift money to family members it’s important that you understand the potential tax implications of making those gifts. Gaining a basic understanding and staying within the rules may enable you to avoid paying tax on the gift altogether and provides you with a great tool from the tax planning arsenal. In this article we will look at the rules you need to be aware of when you gift money to family.

How Much Can I Gift?

If you want to gift money to family members just remember each individual has an annual exemption for gifts of £3,000 per tax year. This means that a grandparent with 3 grandchildren could gift them each £1,000 without having to worry about tax. Just note that the allowance is £3,000 in total not per gift or per person.

The annual exemption can be carried forward 1 tax year so any unused amount from the previous year can also be utilised. This can result in a maximum exemption of £6,000 in a tax year for an individual.

On top of the annual exemption an individual can also give away the following gifts each tax year:

  • Wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great grandchild, £5,000 for a child)
  • Normal gifts out of your income, for example Christmas or birthday presents but you must be able to maintain your standard of living after making the gift (we will look at this in a little more detail later in the article)
  • Payments to help with another persons living costs such as an elderly relative or child under 18
  • Gifts to charities or political parties
And finally, providing the person you are giving the gift to has not been the recipient of one of the exemptions above then you can also give as many small gifts up to the value of £250 as you like. If you exceed these limits and gift money to family in excess of your allowance then don’t worry, nobody is going to be immediately knocking at your door asking for the unpaid tax but it is important to know that there may be tax liability at some point in the future for either yourself (your estate) or the recipient of the gift .

What Counts As A Gift?

As well as considering these rules when you gift money to family members and other individuals you will also need to consider them when gifting belongings. HMRC define a gift as:

  • Anything that has a value such as money, property or possessions
  • loss in value when something’s transferred, for example if you sell your house to your child for less than it’s worth, the difference in value counts as a gift
 In reality it would be very difficult for HMRC to keep track of possessions that have been accumulated over a lifetime and then given away as a gift later in life. Cash gifts on the other hand are usually slightly easier to identify. Unless you sleep with all your money under a mattress then there will usually be some form of paper trail indicating where a gift was given. As well as this the majority of gifts are usually given to close family and friends who are also included in the will so it is expected that any gifts received are disclosed to the executor of the estate.
 

Why Do HMRC Want To Tax Gifts?

Well generally speaking HMRC don’t want to tax gifts that you make to friends, family or most organisations but HMRC also recognise that the gifting of assets is a powerful tool when it comes to tax avoidance and tax evasion. To learn more about the difference between tax avoidance and tax evasion check out our article tax evasion vs tax avoidance – the great debate OR watch our video tax avoidance vs tax evasion, what’s the difference? 

Without some form of control and gifting limits a wealthy individual could simply gift away all of their assets before the end of their life and avoid paying inheritance tax altogether.

Inheritance Tax (IHT)

Inheritance tax (IHT) is a tax payable on the death of an individual who’s estate has a value greater than £325,000. Anything above that amount will be taxed at a rate of 40%.

So how does this fit in when you gift money to family members?

When you give away a gift in excess of the gift allowance detailed above (£3,000 per tax year) the gift is usually considered a potentially exempt transfer or PET for short. This is because they gift may still be exempt from IHT depending on when the donor dies. If the donor of the gift lives a further 7 years following the date of the gift then the gift becomes exempt and no IHT is payable but if the donor dies within that 7 year period then taper relief is applied. The rate of tax payable will be as follows:

Years Between Gift And DeathTax Paid
less than 340%
3 to 432%
4 to 524%
5 to 616%
6 to 78%
7 or more0%

It is also worth noting that under current inheritance tax rules the threshold of £325,000 is increased to £500,000 if the deceased is leaving a property they own to their children (including adopted, foster or stepchildren) or grandchildren and the total value of the estate is less than £2 million.

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Spouses And Civil Partners

The transfer of assets between spouses and civil partners is not subject to inheritance tax rules which means that any gifts made to your spouse or civil partner are exempt from inheritance tax irrelevant of the amount, on the condition that the spouse or civil partner lives in the UK permanently.

The £325,000 inheritance tax allowance also transfers between spouses and civil partners automatically which means that if a wife passes wealth to their husband who subsequently dies then the husband will be able to pass on up to £650,000 worth of assets without having to pay inheritance tax on the estate. Add to this again the additional allowance when passing a property on to children or grandchildren and that amount could increase to a maximum of £1 million.

Who Is Responsible For Paying The Tax If I Gift Money To Family?

This is where it can get a little complicated. When you gift money to family in excess of your allowance it is automatically considered a potentially exempt transfer. If that potentially exempt transfer subsequently fails and becomes liable to IHT because the donor died within 7 years of the gift it is the estate that ends up paying the inheritance tax liability to HMRC rather than the recipient of the gift. The reason for this is because if the responsibility is left with the recipient of the gift and they fail to make payment within 12 months of the death then HMRC will recover the liability from the personal representative (this could be the executor, executory or administrator of the estate) as they take overall responsibility for the IHT liability. As a result of this the liability due on the failed PET is usually paid by the estate before the remainder is distributed to avoid any problems arising at a later date.

There is a different approach taken when someone has given away more than £325,000 in the 7 years before their death. If this were the case HMRC clearly state that the recipient of the gift becomes liable for the inheritance tax liability on the gift.

Example

Stephen dies on 31 December 2020 with an estate valued at £400,000 he has no spouse or civil partner. In the years preceding his death Stephen had also made the following cash gifts:

  1. £20,000 on 12th March 2012 to his daughter
  2. £10,000 on 5th June 2016 to his grandson
In this example Stephens estate is valued at more than £325,000 so the excess of £75,000 will be taxed at 40%. The gift he made to his daughter was more than 7 years prior to his death and is therefore an exempt transfer and not subject to inheritance tax. The second gift made to his grandson was made between 4 and 5 years of Stephen’s death and will be considered part of his estate but will taxed using taper relief at a rate of 24%. In most cases it is the estate that will end up paying this liability before distributing the estate.
 

Gifts Made From Income

There is also a differentiation to be made between gifts that are made from an individuals savings and gifts made from surplus taxed income. It is the gifts made from savings that HMRC target with these rules as it’s your savings that would typically fall under inheritance tax rules. Below are some examples of gifts or regular payments you might make out of your surplus income that would be exempt from the rules:

  • Regular deposits into a savings account for your child
  • Regular support payments to an ex spouse or civil partner
  • Grandparents paying their grandchild’s schooling fees
These are just a few examples of regular payments that could be made out of surplus taxed income. You may need to demonstrate to HMRC that your were able to maintain your current standard of living following the gift. If HMRC believed that these regular payments were an attempt to wind down savings income to avoid inheritance tax then they would be treated as gifts and be subject to the usual allowances. And last but not least, keep a record of all gift money to family, usually by way of a clearly labelled bank transaction. 

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Practice based accountant with over 10 years experience, specialising in SME's, Freelancers and Personal Tax. "I take pride in proactively recognising tax planning opportunities on behalf of clients to help them operate more efficiently."

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