Giving a helping hand, financially, is something which most parents and grandparents want to do for their children and grandchildren, whether it be through gifting money or opening Junior ISAs to help invest in a stable future.
The same may be said for aunts and uncles, or even more distant relations. It is possible to gift some money to family members without paying tax. However, it depends on who you are gifting the money to and when it is given, as well as the amount.
Understanding these rules for gifting money to family members will help you decide what you want to do and the help you can give.
The basics of gifting money to family members
There are some basic ground rules to understand. You can gift money to family members if:
- The gift is given at least 7 years before you die.
- The gift is given to your spouse, civil partner, or a UK registered charity.
- The total gift is less than the annual allowance (currently £3,000).
How to gift money to family members
If you do decide to gift money to family members you may wonder how it is best to give the money.
You have a couple of options. You can of course transfer it to their current account. However, particularly if you are gifting money to a child, you may wish to transfer it to their savings. There are various tax efficient ways that children can save, whereby parents and grandparents can contribute.
Are you wanting to save for a particular family member? These articles might help:
Gifting money to parents: What you need to know
Understanding the rules about gifting money to children
Gifting money to grandchildren: A how to guide
The principles of inheritance tax
Before we discuss the nitty gritty of giving money to family members, it’s key to understand what inheritance tax is.
The basic premise of inheritance tax is that the Government want to discourage individuals from giving away all of their money before they die. Inheritance tax is paid on your estate following your death, in the event that your estate (including property) is worth more than £325,000. This means that anyone who benefits from your Will, shall only receive their ‘share’ once inheritance tax has been paid.
Inheritance tax is paid at 40%, however, this can be reduced to 36% if a minimum of 10% of your estate is donated to charity.
It’s all about the timing
Timing of the monetary gift is important. All financial gifts which are given (no matter who to) more than seven years before you die are exempt from inheritance tax.
If you die less than seven years following the gift then inheritance tax will be due. Between 3 and 7 years before your death, inheritance tax on the amounts gifted will be liable for tapered relief. This means that the amount on inheritance tax due on those amounts is reduced.
How much inheritance tax is due depends on the size of the gift. This is where it becomes a little complicated. If the gift is over the inheritance tax threshold (£325,000) then inheritance tax will be due on the full amount. If the gift is less than this, then its value is added to the total estate and inheritance tax is payable on the amount which goes over the threshold. An example of this would be a gift of £75,000 with an estate worth £300,000. Inheritance tax would only be levied on the £50,000 above the inheritance tax threshold.
It’s all about the recipient
In addition, it matters who you give the money to. If you are gifting money to grandchildren, young adults or dependent children – the rules can change. There are specific things you may want to learn about gifting money to those under the age of 18.
Fundamentally, you may gift money to others as well. However, the relationship between you and the beneficiary matters in terms of the size of gift you can give.
There are a few exemptions to this, which are called exempt beneficiaries. These include your wife, husband or civil partner, subject to them living permanently in the UK. Exempt beneficiaries also include charities registered in the UK and some other national organisations such as educational institutions. For exempt beneficiaries it doesn’t matter how much you give, they are exempt.
Beyond this you are more limited. You may gift a total of £3,000 per year to individuals without being liable for tax. If you don’t use that exemption in a particular year it can carry forward to the next year.
In addition to this you can make what are known as ‘small cash gifts’. These are gifts up to £250. You can give these to as many different people as you like. However, that £250 won’t count as a tax-free allowance if you give them more. Therefore, you can’t decide to give one individual your £3000 allowance and then also gift them £250, without paying tax.
If you’re gifting money to a child and want the money to be used towards their future, you can give the money to a parent to put into a Junior ISA.
Weddings are a slightly different matter
When it comes to weddings and civil partnerships, there’s a little more leniency. The amounts you can give will depend on the relationship between the giver and the recipient:
- Parents: May gift their children up to £5,000.
- Grandparents: May gift their grandchildren up to £2,500.
- Other relationships: You may gift up to £1,000.
Making things regular
The regularity of gifts, and where that money comes from, also affects how much you can give. As long as you make a gift from your taxed income (i.e. not your savings) they may be exempt from tax if they are:
- Maintenance paid to your wife, husband or civil partner (including that paid to exes).
- Maintenance paid to dependent familial relatives (e.g. your elderly parents).
- Maintenance paid to children who are either under 18 or still in full time education.
- Regular monetary gifts for birthdays, Christmas and wedding/civil partnership anniversaries.
- Premiums on life insurance policies.
- Monthly or regular payments made to anyone.
What you can afford
Whilst it is kind and appreciated if you gift generously, remember you should always only give what you feel you can afford. Helping out family financially is hugely beneficial to recipients, but also make sure your needs are met too – investing with a Stocks and Shares ISA is a great way to save and build your financial stability for the future so that you can help yourself as well as others around you.
