Are you thinking about gifting a large sum of cash to your family or friends? Your cash gifts might be subject to Inheritance Tax (IHT). Knowing the rules can help you, and your loved ones, save money. Here's a look at which cash gifts are tax-exempt.
Can You Gift Money Tax-Free in the UK?
The answer to the question depends on:
- Who you are giving the gift.
- How much money you are gifting.
- When you gave the gift.
What does this look like in action? You don’t have to pay tax on cash gifts if they meet the following criteria:
- You gift the cash to your UK-based spouse, civil partner or a registered UK charity.
- You’re gifting less than your annual allowance of £3,000.
- You gave the cash gift more than seven years before you died.
If your cash gift doesn’t meet the criteria, then it could be subject to IHT.
There are intricacies to gifting cash gifts. Below is a look at the detailed conditions on what you can give, when and to whom without paying tax.
Who Can You Gift Cash Without Paying Tax?
There are no restrictions on who you can give cash in the UK, but cash gifts to specific people or bodies might be subject to IHT.
You won’t need to pay any tax on your cash gifts if you are:
- Giving cash to your spouse or civil partner who lives permanently in the UK. Note that it doesn’t include a partner you are not married to or in a civil partnership with, even if you live together.
- Gifting the money to registered UK charities. You can check if your chosen charity qualifies on the Government website.
- Giving cash to specific other national organisations, such as universities, museums and the National Trust.
The above are ‘exempt beneficiaries’. You can gift cash to them without having to worry about paying tax.
On top of this, you can make regular cash gifts or payments with your surplus, taxed income to some family members without paying taxes. Your cash gifts are not subject to IHT when the gift is:
- Maintenance for your spouse or civil partner, or ex-spouse or ex-civil partner.
- Maintenance for relatives who depend on you, such as elderly parents or children under-18 or in full-time education.
- Payment to your child’s savings account.
- A regular gift for Christmas, birthdays or wedding and civil partnership anniversaries.
- Premium payment on life insurance policies.
The critical point here is you must make these gifts using surplus, taxed income and not your savings. You must be able to maintain your current standard of living even after you make the payment. If you don’t, you might need to pay IHT.
How Much Cash Can You Gift Tax-Free?
Gifting cash to people or bodies that aren’t exempt beneficiaries can be subject to tax if you go above certain limits. When you are alive, you are allowed to gift a total of £3,000 each tax year to people as part of your annual exemption.
The allowance is your total allowance for the tax year, not the amount of money you can gift to a single person. For example, if you had two children, you could split the allowance and give £1,500 to each child.
You can carry your annual allowance forward but only for one year. For instance, if you don’t make any cash gifts in 2020/21, then you would be able to make £6,000 in 2021/22.
Small Cash Gifts
You can make small, tax-free cash gifts on top of the annual exemption. You can gift these smaller gifts to as many people as you like, but the sums can’t exceed £250.
Small cash gifts of up to £250 have a few conditions to keep in mind. You need to remember that:
- If you give above £250 as a cash gift, then tax is paid on the whole sum and not the amount above it. For instance, when you gift £300, tax is paid on the entire sum if the gift is subject to tax.
- You can’t gift these small cash gifts to people who have already received all or part of your annual exemption limit.
You can also gift cash as a wedding or civil partnership gift without paying tax. The amount you can give depends on your relationship with the recipient. You can gift:
- Up to £5,000 tax-free to your children.
- Up to £2,500 tax-free to your grandchildren.
- Up to £1,000 tax-free for anyone else.
Taxable Status Depends on When You Gift Cash
Finally, your cash gifts can be subject to IHT depending on when you gifted the cash.
Your cash gifts are exempt from IHT if you gave the gift more than seven years before you die.
If you’ve given the gift three to seven years before your death, the gift will be subject to IHT. However, it will be subject to taper relief, which is a reduced Inheritance Tax rate. Anything under three years is currently subject to the full 40% rate.
The current taper relief rates are as follows:
- Less than three – 40%
- 3 to 4 years – 32%
- 4 to 5 years – 24%
- 5 to 6 years – 16%
- 6 to 7 years – 8%
- 7 or more – 0%
The taxable amount also depends on whether the gift was above the Inheritance Tax threshold. The threshold is currently £325,000. Cash gifts above this are subject to IHT on the total value of the gift. If it’s below, tax only applies to the amount above the threshold.
As the above shows, certain cash gifts are can be subject to IHT. But gifts aren’t taxed at the time of gifting because they are considered ‘potentially exempt transfers’. This means that they will be tax-free only if you survive for at least seven years after making the gift.
The gift becomes tax liable if you die within seven years of gifting it. In those cases, its tax status depends on the amount as well as your total estate value.
Keep the Rules in Mind When Gifting Cash
The above points are essential to keep in mind when you are considering gifting cash. As you can see, most small cash gifts are not subject to tax at any point. Things can get a bit more complicated if you want to gift more considerable sums of cash. Be aware of the potential taxes to help you make smarter choices when gifting money.