How Much Money Can You Gift to a Family Member Tax-Free

Let’s find out how much money can be legally given to a family member as a gift in the UK.

What Constitutes a Gift?

In the UK, gifting money or assets to family members can include a variety of items. Here’s what counts as a gift:

• Household and Personal Items: Things like furniture, jewelry, and antiques given to family members are considered gifts.
• Property: Gifting a home, land, or other types of real estate counts as a gift.
• Shares and Stocks: Any shares listed on the London Stock Exchange can be gifted, as well as unlisted shares held for under two years before your death.
• Discounted Sales: If you sell something, like a home, to a family member for less than its market value, the difference between the sale price and the market value is seen as a gift.

Anything left in your will isn’t considered a gift during your lifetime; it’s part of your estate, which includes all assets left after death. The value of your estate is assessed for potential Inheritance Tax.

Who Doesn't Pay Inheritance Tax?

There is no Inheritance Tax on gifts between spouses or civil partners. You can give them anything you want throughout your lifetime as long as they:

• live in the UK permanently.
• are lawfully married or have a civil partnership with you.

There is also no Inheritance Tax to pay on any donations made to charity or political parties.

Annual Exemption

Every tax year, you can also give away certain amounts without affecting your estate’s value. Known as the annual exemption, this allowance lets you gift up to £3,000 each tax year tax-free. You can either give this amount to one person or split it among multiple recipients. If you don’t use the exemption one year, it can carry over to the next, allowing for a maximum of £6,000 in tax-free gifts.

The tax year runs from April 6 to April 5 the following year.

Normal Spending Out of Income

You can send monthly payments to support a family member, like helping with their living costs, without a limit on the amount you can gift tax-free, provided:

• You can afford the payments after meeting your own regular expenses.
• The payments come from your usual income, like your monthly salary.

These payments, called "normal spending out of income," may include:

• Paying rent for your child
• Contributing to a savings account for a child under 18
• Offering financial support to an elderly relative

If you are giving gifts to the same person, you can combine "normal spending out of income" with other gift allowances, except for the small gift allowance. For instance, you could send your child £60 per month (a total of £720 annually) and still use your £3,000 annual exemption within the same tax year.

The Seven-Year Rule

Under UK tax law, gifts are free from Inheritance Tax if you live for 7 years after giving them unless the gift is part of a trust. This is known as the seven-year rule.

• If you pass away within 7 years of giving a gift, Inheritance Tax may be due, depending on when the gift was given.
• Gifts made within 3 years before your death are taxed at 40%.
• Gifts made 3 to 7 years before your death are taxed at reduced rates through a system called taper relief.

Important Note: Taper relief only applies if the total gifts given within the 7 years before your death exceed the £325,000 tax-free threshold.

Example

Mark gave his daughter Jane £2,000 for the tax year 2022-2023. If he died within 7 years after receiving the gift, he would lose £2,000 of his yearly exemption.

Mark provided £4,000 to his other daughter, Sarah, during the next tax year, 2023-2024. If Mark died within 7 years of receiving the gift, his yearly exemption of £3,000 would be combined with the £1,000 remaining from the prior tax year.

Even if Mark dies within 7 years after delivering these gifts, there will be no Inheritance Tax to pay.

Declaring Cash Gifts to HMRC in the UK

In most cases, you don't need to report cash gifts to HMRC. Recipients generally don’t pay income tax on gifts. However, reporting may be necessary in specific situations:

• Gifts Out of Income Exemption: If you’re claiming this exemption, keep records to show that the gifts meet the qualifying criteria.
• Inheritance Tax (IHT): If you're the executor of an estate, you may need to declare gifts the deceased made within 7 years before their death as part of IHT calculations.
• Complex Arrangements: For gifts involving trusts or other complex arrangements, reporting may be required.

For simple cash gifts within annual limits, reporting is usually unnecessary, but it’s wise to keep records of significant gifts for future reference.

Bottom Line

With careful planning, you can give meaningful, tax-free gifts to your family, helping them financially while lowering future taxes. Tax rules change, and everyone's situation is different, so it's smart to get expert advice. Taxd is here to guide you in using all available exemptions while keeping everything in line with UK tax laws. Let us help you make the most of what you can share with your loved ones.

FAQs

1. Is there a limit to how much I may give my children tax-free?

There is no absolute limit; however, consider the following tax-free allowances:

• £3,000 yearly exemption.
• Unlimited little presents of up to £250 per person per year.
• Regular income-based presents that do not impair your lifestyle.
• Larger gifts may be tax-free if you live for seven years following the gift.

2. How does the seven-year limit apply to several gifts?

Each gift you make starts its own seven-year clock. If you pass away within seven years of making several gifts:

• Gifts are added back into your estate in the order they were given.
• Taper relief may apply to older gifts (those made three to seven years before death), potentially reducing the tax rate on these earlier gifts.
• Tax calculations treat each gift individually, with each subject to its own tax rate based on how much time has passed since it was given.

3. Can I give my home to my children while I still live in it?

Yes, you can gift a property, but there are conditions:

• If you continue to live in it without paying market rent, it’s considered a "gift with reservation of benefit" and remains part of your estate for inheritance tax purposes.
• To remove it from your estate, you’d need to pay market rent and live for 7 years after gifting it.
• Alternatively, you could gift a portion of the property and pay partial rent.

Since this process can be complex, consider consulting a tax expert from Taxd for guidance.

4. What is the tax treatment of donations to grandkids vs presents to children?

They're generally regarded the same, with a few exceptions:

• The annual (£3,000) and small gift (£250) exemptions apply equally.
• The wedding gift allowance is £5,000 for children and £2,500 for grandchildren.
• Trust regulations may vary.
• Gifts to minors may have various income tax ramifications.