If you’re looking to gift money, you’re probably wondering how much you can give away without paying tax. This guide explains all you need to know.
Is every gift subject to gift tax?
No. In some cases, you can gift money without paying tax. Here’s a rundown.
Annual exemption:Everyone in the UK has an allowance of £3,000 a year that they can gift as they please without paying tax.
Small gifts: These are additional small gifts of up to £250 a person you make – such as birthday or Christmas presents – using your regular income.
Wedding or civil ceremony gifts: How much you can gift tax-free depends on your relationship with the person receiving the money (more on this below).
Spouse or partner: You don’t pay any tax if you gift money to your UK-based spouse or civil partner.
Charities and political parties: You don’t pay tax if you gift money to registered UK charities and political parties.
Living costs: You can make payments from your surplus income to help with another person’s living costs, such as an elderly relative or child under 18.
You’ll find more information on these types of gifts below. But, as a quick check, no tax is paid on monetary gifts that meet the following criteria:
You give the gift more than seven years before you die
You give the gift to your spouse, civil partner, or a registered UK charity
The amount is less than your annual allowance of £3,000
Why are gifts taxed?
Gifts are taxed to stop people from trying to avoid Inheritance Tax by giving away all their money before they die.
You can still gift money, as explained above. ButHM Revenue and Customs (HMRC) rulesmean you can’t give away large sums without paying tax.
There’s more information on Inheritance Tax below.
Does it matter who I’m gifting money to?
You can gift money to anyone you like, but there might be tax to pay. There are certain people or bodies to whom you can gift money without paying Inheritance Tax. These are:
Your husband, wife or civil partner, as long as they live permanently in the UK
Registered UK charities (you can check which charities qualify on thegov.uk website)
Some national organisations, like universities, museums and the National Trust
These are known as ‘exempt beneficiaries’. There’s no limit on how much you can gift toexempt beneficiaries.
How much money can you gift as part of your ‘annual exemption’?
While you’re alive, you can give awaya total of £3,000each tax year to people who are not your exempt beneficiaries without paying tax. This is called your ‘annual exemption’. It won’t be added to the value of your estate when it comes to working it out for Inheritance Tax purposes.
Remember that this is your personal allowance. That means you can give away a total of £3,000. You cannot give £3,000 each to several people. For example, if you had three children, you would have to split your personal annual exemption of £3,000 between them. However, their other parent could do the same.
Your annual exemption can be carried forward to the next year if you don’t use it – but only for one tax year. For example, if you don’t make any cash gifts from your annual exemption this tax year, you could give away a total of £6,000 next year. However, be aware that tax rules can change.
What else counts as a gift?
Small cash gifts
On top of your annual exemption, you can also give away small, tax-free gifts of up to £250. You can give these smaller gifts to as many people as you like during the tax year, such as for Christmas or birthday presents. But remember that:
You cannot give a gift of more than £250 and avoid paying tax on the first £250. For example, you cannot give a gift of £400 and only pay tax for £150.
You cannot give these small cash gifts to the people who’ve already received all or part of your £3,000 annual exemption limit. You still have to pay tax on small cash gifts you give to those people.
Wedding gifts
You can also give cash gifts for weddings or civil partnerships without paying tax.
The amount you can give tax-free depends on your relationship with the person receiving the money:
If you’re their parent, you can give them up to £5,000 tax-free
If you’re their grandparent, you can give up to £2,500 tax-free
For anyone else, you can give up to £1,000 tax-free.
However, if the wedding or civil partnership is called off and you’ve already given a gift, it’ll no longer be exempt from Inheritance Tax.
Regular gifts or payments
Gifts that are made using your surplus, taxed income are also exempt from tax. You must be able to prove that these gifts are not coming from your savings.
This includes:
Maintenance for your husband, wife or civil partner
Maintenance for your ex-husband, ex-wife or civil partner
Maintenance for relatives who depend on you, such as elderly parents
Maintenance for children under 18 or in full-time education
Monthly or regular payments to anyone
Paying into your child’s savings account
Regular gifts for Christmas, birthdays or wedding and civil partnership anniversaries
Grandparents paying for their children’s school fees
Premiums on life insurance policies
gov.ukexplains that while these gifts are exempt from tax, you must be able to maintain your current standard of living after making the gift.
Does it matter when you gift the money?
Yes. If you’ve given a monetary gift more than seven years before you die, then it’s exempt from Inheritance Tax.
If you die within seven years of giving the gift, Inheritance Tax will be payable. Gifts that are given three years before your death are taxed at 40%. Gifts that are given three to seven years before your death are taxed on a sliding scale. This is known astaper relief, and it ranges from 32% to 8%.
This table will help you to work out how taper relief might affect the tax due on a gift.
gov.uk has more information on taper relief.
Note that any Inheritance Tax due on gifts is usually paid for by the estate unless you’ve given away more than £325,000 in the seven years before your death. In this case, anyone who gets a gift from you within those seven years must pay Inheritance Tax on their gift.
What if I want to gift a large amount of cash?
If you want to give your child a large amount of money that takes you over the £3,000 annual allowance, there are tax implications. If you died within seven years of giving them this monetary gift, Inheritance Tax could be payable.
But, if you live for seven years after making the gift, there will be no tax to pay. This is called a ‘potentially exempt transfer’.
What’s Inheritance Tax?
Inheritance Tax is paid on your estate when you die. It is currently set at 40%.
Inheritance Tax only has to be paid if your estate’s worth more than £325,000. Your estate includes:
Money in bank accounts
Property you own
Investments or other possessions such as jewellery.
Who pays Inheritance Tax?
Funds from your estate are used to pay Inheritance Tax. Anyone who benefits from your will receives their share of the estate after the tax has been deducted.
Inheritance Tax is usually payable on the value of your estate over £325,000. It’s charged at 40% but this is reduced to 36% if you donate 10% or more of the estate to charity.
For example, if your estate is worth £400,000 and you donate £40,000 to charity, you only pay 36% on £35,000.
It’s important to keep a record of:
What you give away
Who you give money, gifts or possessions to
When you give money, gifts or possessions away
How much money you give, or what the gifts or possessions are worth
This will make it far easier for the executor of your estate to work out what tax needs to be paid.
Find out more about Inheritance Tax here.
How do you go about gifting money?
The easiest way is totransfer the moneyinto the recipient's bank account. This could be a current account or a savings account.
If the person you’re gifting money to plans to put it into savings that they can withdraw from easily, they could open aninstant access savings account.Compare savings accounts hereto find the best one for your beneficiary.
You can also gift money by:
Writing a cheque
Transferring propertysuch as your home or car.
*All information is based on 2021/22 tax rules.
