The Easy Guide to Gifting & Inheritance Tax


Whether you want to boost the grandchildren’s savings account, help your 
child get onto the property ladder, or support a friend in need, gifting money is generous – but also complicated. There are inheritance tax rules that apply to money gifts, especially if the financial help is substantial.  

It’s always a good idea to contact a financial adviser to help you disentangle the ins and outs of money gifting, but if you want to get an idea about how gifting tax-free generally works and what your tax-free gift limit is, here is an easy guide. 

Why is there a tax on gifts?   

The whole process of giving money to family or friends is governed by rules designed to prevent people from not paying Inheritance Tax by giving away all their money before they die. It’s why there are tax-free gift limits that make sure you can’t give away large amounts of money without paying tax. 

What is considered a gift? 

According to GOV.UK, a gift is considered anything that has a value – that could be cash, property, and other possessions. It also includes a loss in value when possessions exchange hands. For example, if a house is sold to you at less than the value it’s worth, the difference is considered a gift. Which means that if inheritance tax is due, this can apply not only to money gifts, but also to other gifted possessions, such as cars and jewellery. 

Gifting and inheritance tax: the basics 

You can give away a total of £3,000 per financial year without being liable for inheritance tax. This is your annual exemption. If you haven’t used it during the year, you can carry it forward to the next (with the limit increasing to £6,000) but only for one year. You can also give an unlimited amount of small cash gifts, up to £250 per person, as long as no other exemptions are being used. 

The general rule is that as long as you keep the money you give to your family under the £3,000 mark, you are not liable to pay inheritance tax. However, personal circumstances vary, so it’s vital to speak to a financial adviser about your specific situation. 

How much can you gift tax-free to each family member? 

Things can get a bit more complicated as different rules apply to different family members. Here is what you need to know. 

Gifting money to your spouse 

Your wife, husband, or civil partner are considered exempt beneficiaries. This means that no matter how much you give them, they are not liable for tax as long as they live in the UK permanently. Gifts to an unmarried partner may trigger Inheritance Tax rules – speak to a financial adviser about your specific situation for more help. 

Gifting tax-free to your children 

When it comes to children, it’s not only how much money you can give them, it’s also when you give it that matters. As will all other recipients, you can give your children money up to the annual exemption and it will not be liable for tax.  

And you can gift money in excess of the annual exemption and not pay inheritance tax, as long as the financial gifts are given at least seven years before you die. The idea here is that the money should not have been an inheritance. If you give the gift and live for another seven years, it’s a gift and not inheritance money. But if you give the gift and pass away within the next seven years, it will be considered an inheritance, and so tax of up to 40% is owed – depending on how many years have passed since the gift was offered, and whether the value exceeds £325,000. 

If you die between three and seven years after making a gift, a mechanism called “taper relief” comes into action, which means the Inheritance Tax is applied at a reduced rate. 

According to GOV.UK, this is how the percentage of tax paid varies according to the number of years between gift and death:  

Years between gift and death  Tax paid 
less than 3  40% 
3 to 4  32% 
4 to 5  24% 
5 to 6  16% 
6 to 7  8% 
7 or more  0% 


If your gift is less than £325,000, it will be added to the value of your estate and tax is applied to the amount that goes over the threshold. For example, if your estate is worth £320,000 and you gifted £10,000, your estate will only pay tax on the difference between the total value and the £325,000 threshold, which in this example is £5,000.
 

If your gift is more than £325,000, tax needs to be paid on the total value. 

Keep in mind that the seven-year rule doesn’t apply to the annual exemption of £3,000. And there is also another £5,000 annual exemption for parents giving to children when they marry. 

It’s always important to speak to a financial adviser if you’re considering giving a large financial gift so you can get personalised advice to your situation. 

Gifting money to grandchildren 

Whether it’s pocket money or a graduation gift, if you wish to gift tax-free money to grandchildren, the same seven-year rule discussed above applies. In this case as well, the tax-free gift limit is £3,000 is available and there is another £2,500 exemption for money given to grandchildren when they marry. 

Types of tax-free gifts 

Small cash gifts 

According to HRMC, a small cash gift is considered anything under £250. In this case, you don’t have to pay tax as long as there are no other exemptions being used. For example, if you give the same family member £3,000 as well as a small cash gift of £250 during the same financial year, you may be liable for tax for the value of £250. 

Wedding gifts 

The rules are different when it comes to wedding or civil ceremony giftsThe tax-free gift limits vary depending on the relationship: 

  • Parents can give up to £5,000 tax-free to children 
  • Grandparents can give up to £2,500 tax-free to grandchildren 
  • Any other person can give up to £1,000 tax-free 

Keep in mind that there is one condition: that the wedding has actually taken place. If the event is called off, the wedding gift is no longer exempt from tax. 

Cash gifts for Christmas and birthdays 

If you’re giving a cash gift for Christmas or birthdays, this is considered tax free as long as the giver can maintain their standard of living after making the gift. There is a bit of ambiguity as to how this gets decided, but the main point is that small gifts are not the target for inheritance tax rules. To avoid any surprise tax bills, it is best to ask for the guidance of a financial adviser before giving (or accepting) any substantial gifts. 

The basic rules of gifting tax-free 

 In summary, you can give money to loved ones without paying tax when: 

  • You give the gift at least seven years before you die 
  • You give the gift to your spouse or civil partner 
  • The total amount is less than the annual allowance of £3,000 
  • The gift is a small cash payment of less than £250 
  • The gift is a wedding gift of up to 1,000 (or £5,000 if the gift is for a child and £2,500 if it is meant for a grandchild) and the wedding has taken place 
  • The gift is an ordinary Christmas or birthday present and you can show making the gift hasn’t affected your standard of living 

Remember, it’s always better to be on the safe side and ask for professional advice from an adviser to make sure your gift is indeed free of any tax obligations. 

Not sure how to discuss the financial gift you want to offer with your family? Here is an easy guide to help you navigate the conversation about gifting money to family in a successful way. 


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