As parents and grandparents, we all want to give our loved ones a head start in life - whether that’s helping them buy their first home, paying for education, or making sure they can enjoy life’s big milestones. But when it comes to gifting money, the UK tax rules can feel like a bit of a maze.
However, with a little planning, you can give generously without paying unnecessary tax. Let’s break down the rules in plain English so you can pass on more of your hard-earned money to the people who matter most.
Understanding the Basics
You can gift as much money as you like to your children or grandchildren, but not all gifts will be tax-free. HMRC allows certain amounts to be given each year without tax. Go above those limits, and the gift might be treated like part of your estate, potentially attracting inheritance tax.
Inheritance tax can be as high as 40% if you pass away within three years of making a gift, it then reduces on a tiered scale until 7 years have passed. But there are several allowances and strategies to help you keep your money within your family.
Tax-Free Gifts You Can Make
Here are the main ways to gift money without paying tax:
Annual exemption
- You can gift up to £3,000 each tax year without it being taxed.
- If you didn’t use last year’s allowance, you can carry it forward, meaning you could give up to £6,000.
- You can only carry it forward for one year.
Small gift exemption
- You can give up to £250 to as many people as you like each year.
- This must be separate from your annual exemption.
Weddings or civil ceremonies
- Parents can give up to £5,000 tax-free to a child getting married.
- Grandparents can give up to £2,500.
Regular gifts from income
- HMRC will want evidence that the gifts are regular and come from surplus income.
Other gifts may be potentially exempt transfers. If you live for more than seven years after making them, they won’t be taxed. If you pass away sooner, the amount may be taxed depending on the timing.
Other Ways to Give Without Paying Tax
Contribute to a Junior ISA
- Parents or guardians can open the account, but anyone can contribute.
- The annual limit is £9,000, and all returns are tax-free.
Set up a trust
- A trust can hold money until your child or grandchild reaches a certain age.
- Trusts have complex tax rules, so it’s worth getting professional advice before setting one up.
Planning Ahead to Reduce Inheritance Tax
The earlier you start, the more options you have:
Work out your estate’s value – Include everything from property and savings to jewellery and cars.
Gift possessions instead of money – This could help reduce your estate’s taxable value, but watch out for capital gains tax if items are sold later.
Use your allowances early – The sooner you start gifting, the more you can take advantage of the seven-year rule.
Keep records – Write down when, how much, and to whom you’ve given gifts.
Consider writing life insurance in trust – This could keep the payout outside of your estate for tax purposes.
Gifting money is a wonderful way to support your family and give them the freedom to live the life they want. But without planning, the taxman could take a larger slice than you’d like.
By understanding the rules, making use of your allowances, and seeking advice when needed, you can pass on more of your wealth.
If you’re unsure about the best approach for your family, we’re here to make it simple, stress-free, and tax-efficient.
This blog does not constitute advice, for information regarding your specific circumstances please talk to a financial adviser.
