You can easily gift money to your family and l loved ones in the UK. However, you need to keep in mind that inheritance tax can apply to certain monetary gifts. It is important to understand the tax rules regarding giving and receiving gifts for your family. This guide covers everything you need to know. You will also find the answer to the question: do I pay tax on gift money from parents UK?
First, let’s discuss what counts as a gift.
What Qualifies as a Gift?
Anything that has value can count as a gift. This includes:
- Land or property.
- Possessions such as furniture, antiques, and jewellery.
- Shares and stocks that are listed on the London Stock Exchange.
- Unlisted shares you had for fewer than two years before your passing.
Additionally, a gift may include something whose value decreases. Suppose you sell your house to your child. The price you sell it for it less than its actual worth. In that case, the difference in the value counts as a gift to your child.
Does Tax Apply to All Gifts?
The short answer is no, not all gifts are subject to tax. In fact, some of them are exempt from gift tax. Nevertheless, there are certain conditions for exemption. For example, how much monetary value the gift has and who you give the gift to.
During your lifetime, you can give as many gifts as you want to your spouse or civil partner. They are all exempt from gift tax. Additionally, you can leave your estate to them as a gift. This includes money and assets. By doing so, you make your spouse or civil partner a beneficiary of the estate. Therefore, inheritance tax does not apply as they are an ‘exempt beneficiary’.
Furthermore, trusts, national organisations, and charities also qualify as exempt beneficiaries. This means that whatever you gift to them is exempt from gift tax.
No limit exists for gifts that you give to exempt beneficiaries. However, the rules differ when you give a gift to someone who is not an exempt beneficiary. So, do I pay tax on gift money from parents UK?
How Much Money Can I Give as a Gift Free of Tax?
As mentioned above, a limit exists when you give gifts to someone who is not an exempt beneficiary. You have an annual gift allowance of £3,000, which is tax free. This is called your annual exemption. This allowance in not included in the value of your estate.
You can transfer the allowance to the next year if you do not use it in one year fully. However, you can do this only once. Which means that you cannot roll any unused allowance over for another year, as in a second year.
If you cross over this threshold of allowance, then inheritance tax may apply to the gifts you give in case you pass away. Nevertheless, this is applicable if you pass away within seven years of giving gifts. No tax applies if you live for more than seven years after you give the gift. Thus, do I pay tax on gift money from parents UK?
Is There a Limit to How Much I Can Gift My Children?
When it comes to giving money to your children as a tax-gift, there is a limit. It needs to fall into your £3,000 annual exemption. However, this does not mean that your gifts cannot exceed this threshold. All you must do is consider the timing.
Suppose you give monetary gifts to your children, and they are more than £3,000 in a tax year. Then, you must live longer than seven years afterwards. This way, they are not included in the value of your estate. Which would make them liable to inheritance tax otherwise. This is called PET, which stands for potentially exempt transfer. In case you pass away within seven years of giving monetary gifts to your children, then inheritance tax may apply. The amount of tax that applies depends on when you gave the gift. Then, do I pay tax on gift money from parents UK?
You must keep a record if you give monetary gifts to your children. It must state what the gift was, when you gave it, its worth, and whom you gave it to. In case there are any income or gains arising from the gift, then other tax implications can exist. Thus, even though it is exempt from inheritance tax, capital gains tax may apply.
What Gifts are Exempt from Tax?
Certain gifts are exempt from inheritance tax in the UK. These include the following:
- Small gifts worth £250 or less are exempt from tax each year. The only condition is that you did not use another allowance on the person you are giving it to.
- Cash as a wedding gift is also exempt from tax. However, it is dependent on the type of relationship you have with the person you are giving the gift to. If you are giving it to your child, then you can give up to £5,000. Whereas, if you are giving it to your grandchild at their wedding, then you can give up to £2,500. Furthermore, if it is a friend is getting married, then you can only give up to £1,000.
- Another category of gifts that are exempt from are ‘everyday’ gifts. These are the gifts you give on birthdays or on Christmas. The condition for exemption is that you can still maintain your standard of living after giving the gift.
- If you are helping another person by making payments towards their living costs, then that is also exempt from gift tax. For example, if you are helping a child who is not yet 18 or an elderly relative.
- When you make charitable donations to institutions, then those are exempt from gift tax as well. You can give tax-gifts to museums, art galleries, and heritage funds. Furthermore, if you are a higher rate taxpayer, then donating to a registered charity can reduce your income tax liability.
- You can give tax-gifts to political parties also. Although, there are conditions. At least two of the party members must be voted to the House of Commons. Or if there is only a party member who was elected, then the part should receive a minimum of 150,000 votes.
Is Timing Important When Giving a Gift?
If you give a gift to someone, then timing does matter. If you live for more than seven years after giving a gift, then inheritance tax does not apply.
In case you give a gift and pass away within seven years of giving it, then inheritance tax is due. However, the rate reduces based on the number of years since the time of giving the gift. This reduction in rate is called taper relief. Thus, do I pay tax on gift money from parents UK?
The following table states how much tax you owe. It is according to the number of years between when you gave the gift and your passing:
|Years Between Giving Gift and Passing||Tax Rate|
|Less than 3 years||40%|
|3 to 4 years||32%|
|4 to 5 years||24%|
|5 to 6 years||16%|
|6 to 7 years||8%|
|7 years or more||0%|
Taper relief does not apply to the value of your gift. This means that it does not reduce the gift’s value. Instead, it reduces the amount of tax the person owes on the gift. Make sure to include this information when you file your self-assessment tax return and submit it to HMRC.
Do I Pay Tax on Gift Money from Parents UK?
The nature of the gift and the time your parents gave it to you determines whether you owe tax. As you already know, certain gifts are exempt from tax. There is no need to pay tax on everyday small cash gifts. These include money that you receive on Christmas or on your birthday as a present. However, it should not have an impact on the living standard of your parents.
Please note that every individual has an annual gift exemption of £3,000. Which means that parents can give a total of £3,000 monetary gifts to their children annually. These are exempt from tax. What you must understand is that this allowance is applicable to the total value of all monetary gifts. Suppose your parents already gave £2,000 to your siblings or other family members. In that case, they can only give £1,000, which is exempt from tax.
Additionally, you can receive up to £5,000 tax-free when you get married. If your parents did not use their annual allowance, then they can choose to combine it with your wedding gift. This means that they can gift you up to £8,000 tax-free.
Obviously, your parents can give you more cash gifts than those mentioned above. However, they must live for seven years longer after making the gift. Only then it is exempt from tax. In case your parents pass away, those gifts go back into their estate. This is done at the time of calculating inheritance tax. So, do I pay tax on gift money from parents UK?
You must keep in mind that despite not owing inheritance tax on gifts from parents, other tax implications can exist. For example, capital gains tax can apply to any income or gains generating from the gifts.
How Can I Avoid Paying Gift Tax?
- Gifts you give to charity.
- Small gifts of up to £250 (You must give them through your regular income).
- Gifts you give to your spouse.
- Cash as a wedding gift.
- Gifts you give to help someone with their living costs.
Moreover, you can write your life insurance policy in trust. This way you can minimise or avoid inheritance tax. Then, do I pay tax on gift money from parents UK?
You place a person you trust in charge of your policy after your passing through writing your policy in trust. This is a free option available to you.
By doing so, this person takes the responsibility of distributing your pay out according to your wishes. Since your policy is not a part of your estate, 40% inheritance tax does not apply. This means your beneficiaries do not need to pay IHT about the payout they receive.
This option not only minimises the inheritance tax you owe, but also helps by:
- Removing the probate process, which takes up to nine months.
- Allowing you more control over your policy.
Is It Necessary to Declare Cash Gifts to HMRC?
For any small cash gifts that are under £250, there is no need to inform HMRC. Also, you do not need to declare any gifts that fall under your annual exemption of £3,000. However, if you exceed this threshold of exemption, then you may need to pay tax. Which means you must declare it to HMRC. If you do not declare these gifts to HMRC, you will end up paying expensive fines. Then, do I pay tax on gift money from parents UK?
Protecting Gifts Through Trusts
In case you have concerns regarding the usage of your gift to a family member, then trusts are the way to go. Through Trusts you gain control and can keep your gift within the family bloodline.
Moreover, for trusts, the same seven-year rule is applicable. However, you should know the type of Trust you are using for your gifts.
Any gift you make to a Bare Trust is going to fall into the category of Potentially Exempt Transfer. Whereas any gift you make to a discretionary Trust that is over the Nil Rate Band is classed as a Chargeable Lifetime Transfer. An immediate inheritance tax charge applies to them. It is ideal to reach out for expert financial advice, as this is a complex matter. Thus, do I pay tax on gift money from parents UK?
Do I Owe Tax on Cash Gifts to My Spouse or Civil Partner?
You do not need to pay tax on monetary gifts to your spouse or civil partner. This means that you and your spouse/partner can give each other as many cash gifts as you like. They are exempt from regardless of when you give the gift.
What Conditions Apply When Giving Money to My Spouse or Civil Partner?
If you want to give tax-gifts to your spouse or civil partner, then you must meet the following conditions:
- You and your partner live together for at least some part of the tax year and did not separate.
- At the time, you both live in the UK permanently.
- The purpose behind the gift was not as a good for their business to sell on.
To conclude, you need to understand how tax applies to the gifts you give to your family. You have an annual exemption of £3,000. However, if you give more than that, then tax can apply. Certain types of gifts are tax free, and you can give them throughout the year however much you want to. Furthermore, some gifts are exempt if you live for more than seven years are giving them. Therefore, you must know how much monetary gifts you can give and when you can give them.