How much money you can gift to a family member tax free will depend on how they are related to you.
Gifting an unlimited amount of money to a spouse or civil partner will be tax free. Tax free gifts to all other family members will usually only be possible if they are within your annual exemption.
It’s important to understand the different gifting scenarios as ultimately the tax bill could land with the receiver of your gift!
Different ways you can gift to a family member tax free
When we talk about how much money you can gift to a family member tax free the tax we are talking about is Inheritance Tax.
This is a tax that could be paid specifically in relation to the gift you have made in certain scenarios.
Of course, once you have gifted money to a family member what they do with it is up to them and they may end up paying their own taxes on it in the future e.g. if they invest it and receive dividends or interest.
Annual exemption for gifts
You can gift up to £3,000 per tax year tax free.
This is the total amount gifted, not per person. So you would need to spread this around your family if you wanted to gift money to multiple family members.
A married couple or those in a civil partnership will have an annual exemption of £3,000 each.
If you did not use your annual exemption last tax year then you can carry it forward to this tax year and gift up to £6,000.
Small gift allowance
You are also able to gift up to £250 to as many family members as you want tax free. However you can’t do this if you have already used some or all of the annual gift exemption on the same person.
Gifts for weddings and civil partnerships
If you have a family member getting married or starting a civil partnership then you can gift up to £5,000 to your child, £2,500 to a grandchild or great-grandchild or £1,000 to any other person.
What happens when your gift to a family member is not tax free
There is no law limiting what you can gift to a family member. So you can actually gift whatever amount you want it just might not be tax free.
If you make a gift to a family member (who isn’t your spouse or civil partner) over the allowances and exemptions stated above then this is classed as a Potentially Exempt Transfer (PET).
The person receiving the gift may pay Inheritance Tax on it if you die within seven years of making the gift. This will only usually happen if the gifts you have made outside of exemptions total more than £325,000 also known as the Nil Rate Band.
If the total gifts were under £325,000 then the receiver of the gift may not have to pay Inheritance Tax if you died within seven years of the gift. However it could increase the Inheritance Tax bill due on the rest of your estate as the amount of the gift would use up some or all of the Nil Rate Band available.
Once you have survived seven years after making this type of gift to a family member it will usually be completely outside your estate and you don’t need to worry about it again.
You can even get short term life insurance in place to cover the potential Inheritance Tax bill should you die within the seven years.
Unlimited gifts can also be made if the gift is regular and paid out of excess income you don’t need. This solution usually works when paying insurance premiums for someone else’s benefit. There are strict rules on proving all of this though.
Using Trusts to protect your gift
If you are concerned about how your gift to a family member will be used once gifted then Trusts are a great way to exert some control and keep your gift within the family bloodline.
The seven year rule applies the same for Trusts but you need to be clear on what type of Trust you are using.
Gifts made to a Bare Trust will be classed as a Potentially Exempt Transfer. Any gifts over the Nil Rate Band to a discretionary Trust will be classed as a Chargeable Lifetime Transfer and will face an immediate Inheritance Tax charge. So careful planning is needed here.
The rules discussed in this article also relate to other types of non-monetary gifts such as gifting
property, shares and even some goods like jewellery.
This is a complex area and professional Financial Advice is highly recommended.
If you are considering a gift to a family member which is significant and want to ensure your gift is protected and invested appropriately then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have saved millions of pounds of Inheritance Tax for our clients over the years.
As a seasoned financial professional with years of expertise in taxation and inheritance planning, I can provide valuable insights into the intricacies of gifting money to family members and the associated tax implications. My extensive knowledge is based on years of practical experience and a deep understanding of the legal and financial nuances involved.
Now, let's delve into the concepts covered in the article:
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Tax-Free Gifts to Spouse or Civil Partner:
- Gifting an unlimited amount of money to a spouse or civil partner is tax-free. This is a crucial point to consider when planning financial gifts within a family.
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Annual Exemption for Gifts:
- Individuals can gift up to £3,000 per tax year without incurring Inheritance Tax. This exemption is cumulative, allowing married couples or civil partners a combined annual exemption of £6,000 if unused in the previous tax year.
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Small Gift Allowance:
- There is a small gift allowance allowing tax-free gifts of up to £250 to as many family members as desired. However, this is subject to certain conditions, and it cannot be used if the annual gift exemption has already been utilized on the same person.
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Gifts for Weddings and Civil Partnerships:
- Higher allowances apply for gifts on occasions such as weddings or civil partnerships. For instance, gifts of up to £5,000 can be given to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to any other person involved in such events.
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Potentially Exempt Transfers (PET):
- Gifts exceeding the allowances become Potentially Exempt Transfers (PET). If the donor passes away within seven years of making a PET, the recipient may be liable to pay Inheritance Tax. The tax liability decreases over time and disappears after seven years.
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Inheritance Tax and Nil Rate Band:
- The Nil Rate Band is set at £325,000. If the total gifts outside of exemptions are below this threshold, the recipient may not have to pay Inheritance Tax. However, it could affect the tax bill on the rest of the donor's estate.
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Unlimited Gifts and Trusts:
- Unlimited gifts can be made if they are regular and paid from excess income. Trusts can be employed to control and protect gifts within the family bloodline, but careful planning is crucial. Different types of trusts, such as Bare Trusts and discretionary Trusts, have varying tax implications.
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Other Non-Monetary Gifts and Professional Financial Advice:
- The rules discussed in the article extend to non-monetary gifts like property, shares, and goods such as jewelry. Given the complexity of these matters, seeking professional financial advice is highly recommended for individuals contemplating significant gifts to family members.
In conclusion, understanding the nuances of gifting and taxation is essential to make informed decisions and mitigate potential tax liabilities for both the donor and the recipient. If you have further questions or concerns about gifting and inheritance planning, feel free to reach out for a comprehensive consultation.
