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
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
- A 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
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 Death||Tax Paid|
|less than 3||40%|
|3 to 4||32%|
|4 to 5||24%|
|5 to 6||16%|
|6 to 7||8%|
|7 or more||0%|
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.
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:
- £20,000 on 12th March 2012 to his daughter
- £10,000 on 5th June 2016 to his grandson
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