Gift Money to Family, whether to help with a house deposit, university fees, or simply to provide financial support, is a common and generous act. However, a question that frequently arises is: what are the tax implications? In the UK, the rules around gifting money are intrinsically linked to Inheritance Tax (IHT), and understanding them is crucial to ensure your generosity doesn’t result in an unexpected tax bill for your family down the line.
The good news is that you can absolutely gift money to family members tax-free. There is no specific limit on the total amount you can give away. You could, in theory, gift £1 million tomorrow. The critical factor is not the amount itself, but the timing of the gift and whether you survive for seven years after making it.
This comprehensive guide will walk you through the various tax-free allowances, explain the pivotal “seven-year rule,” address how to gift large sums like £100,000, and clarify your responsibilities to HMRC.
Understanding the Basics: Inheritance Tax (IHT) and Gifts
When you gift money, it doesn’t attract immediate tax for you or the recipient. The primary concern is Inheritance Tax. HMRC views some gifts as a way of reducing the value of your estate before you pass away to avoid IHT.
Currently, every individual has a nil-rate band of £325,000. This is the value of your estate that can be passed on tax-free upon your death. Anything above this threshold is typically taxed at a hefty 40%. Gifts made within the seven years leading up to your death can be counted as part of your estate, potentially using up this tax-free band and triggering an IHT bill.
However, there are several valuable exemptions and allowances that allow you to make gifts completely tax-free, without ever having to worry about the seven-year countdown.
Your Tax-Free Gifting Allowances: How Much You Can Give Each Year
These allowances are the simplest way to gift money without any IHT implications. They are used up each tax year (6th April to 5th April).
The Annual Exemption
This is the most well-known allowance.
- Amount: You can give away a total of £3,000 each tax year.
- Flexibility: This can be given to one person or split among several people. For example, you could give £1,500 to two different children.
- Carry Forward Rule: If you don’t use your full £3,000 allowance in one tax year, you can carry the unused portion forward to the next tax year, but for one year only. This means you could potentially gift up to £6,000 in a single year if you didn’t use the previous year’s allowance. A couple could therefore gift up to £12,000.
The Small Gifts Exemption
This allowance is designed for smaller presents.
- Amount: You can give as many gifts of up to £250 per person as you want each tax year.
- Key Condition: You cannot use this exemption for someone who has already received a gift from you that uses part of your £3,000 annual exemption.
Gifts for Weddings or Civil Partnerships
You can also make a one-off tax-free gift to someone who is getting married or entering a civil partnership.
- £5,000 from a parent
- £2,500 from a grandparent or great-grandparent
- £1,000 from anyone else
Gifts to Help with Living Costs
Regular payments to help with another person’s living costs are not subject to IHT, provided you can prove you can afford them. This can include payments to:
- An ex-spouse or former civil partner.
- An elderly relative.
- A child under 18 or a child in full-time education.
Regular Gifts from Surplus Income: A Powerful Exemption
This is one of the most useful but often misunderstood IHT exemptions. It allows you to make regular gifts of any size, provided you can meet three strict conditions:
- Pattern: The gifts must be part of a regular pattern of giving. This could be monthly, quarterly, or annually for birthdays or Christmas.
- Made from Income: The gifts must be made from your surplus income (not capital like savings).
- No Impact on Lifestyle: After making all your usual payments and the gifts, you must be left with enough income to maintain your normal standard of living.
This exemption is powerful because there is no limit to how much you can give, but it requires meticulous record-keeping of your income and expenditure to prove to HMRC that the conditions have been met.
Gifting Large Sums: The “Seven-Year Rule” Explained
What about gifts that are larger than your annual allowances, like gifting £100,000 to your son for a house deposit? These types of gifts are known as Potentially Exempt Transfers (PETs).
- What is a PET? A PET is a gift that will become fully exempt from Inheritance Tax if you, the giver (donor), live for seven years after making it.
- The Countdown: The seven-year clock starts on the date you make the gift. If you survive for the full seven years, the money is no longer considered part of your estate for IHT purposes, and no tax is due on it.
- What if you die within seven years? If you pass away within this period, the gift becomes a “chargeable transfer.” It uses up some or all of your £325,000 nil-rate band. If the value of the gift (and any other gifts made in the seven years) exceeds your nil-rate band, IHT will be due on the remainder.
Taper Relief: Reducing the Tax Bill
If IHT is due on a gift because you passed away between three and seven years after making it, “taper relief” can reduce the amount of tax payable. The reduction is applied to the tax, not the value of the gift.
- 0-3 years: No reduction (40% tax)
- 3-4 years: 20% reduction (32% tax)
- 4-5 years: 40% reduction (24% tax)
- 5-6 years: 60% reduction (16% tax)
- 6-7 years: 80% reduction (8% tax)
Practical Steps and Record-Keeping
While the recipient of a cash gift generally does not need to declare it, the giver should keep clear records.
- What to Record: Keep a simple note of what you gave, who you gave it to, when you gave it, and how much it was worth.
- Why it’s Important: This record is crucial for the executor of your will to accurately calculate the value of your estate and determine if any IHT is due on gifts made in the seven years before your death. For gifts from surplus income, detailed records of your finances are essential proof for HMRC.
Frequently Asked Questions (FAQs) About Gifting Money
So, can I gift £100k to my son in the UK?
Yes, you can absolutely gift £100,000 to your son. This gift would be considered a Potentially Exempt Transfer (PET). If you live for seven years after making the gift, no Inheritance Tax will be due on it. If you pass away within seven years, it will use up £100,000 of your £325,000 tax-free nil-rate band when your estate is calculated.
Do I need to declare cash gifts to HMRC in the UK?
The recipient of a simple cash gift does not need to declare it to HMRC. The giver does not need to declare it at the time of the gift either. The responsibility falls to the executor of the giver’s estate to declare any gifts made in the seven years prior to death as part of the IHT calculation process.
How much money can I receive as a gift from overseas in the UK?
There is no specific limit on the amount of money you can receive as a gift from overseas. For the UK-based recipient, a genuine gift is not treated as income and is not subject to Income Tax. The primary tax consideration is Inheritance Tax from the giver’s country of residence, which would depend on that country’s laws. You should also be aware that banks are required to conduct anti-money laundering checks on large international transfers.
What is the most money you can be gifted?
There is no legal limit on how much money you can be gifted. The key consideration is not the amount but the potential Inheritance Tax liability for the giver’s estate if they do not survive for seven years after making the gift.
I saw advice on Reddit about gifting money. Is it reliable?
While forums like Reddit can be a useful starting point for gathering personal experiences, they are not a substitute for professional financial or legal advice. UK tax law is complex and specific to individual circumstances. Information can become outdated, or may not apply to your situation. For significant financial decisions, always consult official sources like the GOV.UK website or a qualified tax advisor.
Do I pay tax on a gift of £50,000?
As the recipient, you do not pay tax on a gift of £50,000. For the giver, this would be a Potentially Exempt Transfer. As long as they live for seven years after giving it, it will be entirely free of Inheritance Tax.