Cash gifts at Christmas – The essential tax facts you need to remember

Christmas can be the perfect time of year to give family members a cash gift, especially if you’re unsure of what to buy someone. However, whether it’s enough to help your children climb onto the property ladder or just a lump sum to help those closest to you, generous cash gifts can carry a taxable charge.

This mostly comes in the form of inheritance tax (IHT), which can be complicated to understand. Below we’ve explained some options on how to give cash this Christmas, and the tax implications to bear in mind.

If you’re planning to give money this Christmas, it’s worth knowing about any potential tax on cash gifts.

Firstly, it’s important to note any cash gifts you give this Christmas out of your regular income, as opposed to coming from your savings or another form of capital, won’t be subject to inheritance tax.

However, even if you plan on giving larger sums this Christmas, you have certain allowances that are exempt from inheritance tax.

Everyone can gift up to £3,000 each tax-year without incurring any inheritance tax charges. This is known as your annual exemption and can be used on one person or divided between several people.

If you didn’t make maximum use of this allowance in the previous tax-year, then this balance will be brought forward and added to your current limit. This is only available for the previous tax-year, which means the most your current allowance can ever be is £6,000.

Alongside this, you’re also permitted a separate small gifts allowance. This allows you to gift up to £250 tax-free per person per year for as many people as you like, but this cannot be combined with the annual exemption for the same person.

To help ensure you don’t exceed these allowances, it’s a good idea to keep a record of the cash gifts you give, both at Christmas and throughout the year.

Meanwhile, in terms of income tax, there are no implications when giving cash as a present unless that gift generates interest or dividends. Even if this is the case, you still may not have to pay if any returns fall within either your personal savings or dividend allowances . Beyond these limits, the amount you’ll be taxed will depend on your income tax band.

Any cash gifts to spouses and civil partners who live in the UK are not liable for inheritance tax, regardless of the amount you give.

However, if you plan on gifting your husband or wife any shares for Christmas, rules around Capital Gains Tax (CGT) can become more complicated.

The rule is that if you live with your partner during the current tax-year then CGT is not applicable. If they then decide to sell these shares later on, they will be liable to CGT.

This is a brief explanation of how this works, for more detail it’s best to consult an independent financial adviser.

Even if you exceed the inheritance tax allowance limits (explained above) this Christmas, you may still avoid paying this tax.

This is because of the seven-year rule, which states that inheritance tax charges only apply if you die within seven years of making your gift. During this period, the gift is known as a potentially exempt transfer (PET) as it may or may not be exempt from inheritance tax.

If you die within this seven-year period, your beneficiaries will be taxed according to a sliding scale. Essentially, the longer the period between death and when the gift was made, the lower the inheritance tax charge. This is broken down as follows:

Remember, inheritance tax will only be payable if the total value of your estate is liable for the tax. This includes the value of all your assets, such as your home.

For more information about how cash gifts are taxed, read our guide: How much can I give as a cash gift and how is tax affected?

His Majesty’s Revenue and Customs (HMRC) won’t know if you’ve gifted money or if you have exceeded your allowances, making it your responsibility to declare any illegitimate transactions.

This being said, you won’t necessarily have to do this straight away, as inheritance tax will only be incurred if you die within the seven years (explained above).

In this case, any executor of your estate would then have to inform HMRC about any gifts over the allowances, making it vital that you record how much you give and when. This will help make the process easier to avoid any potential penalties. Note, however, that any recipients won’t need to declare gifts as part of any self-assessments.

If you’re unsure on how much you may have gifted, or about anything else in this area, it could also be worth seeking professional advice to ensure any transactions you make follow regulations.

Giving money as a gift for Christmas can be a popular choice for many, especially if you’re stuck on what to get someone.

While a gift card for a favourite brand or shop can add more of a personal touch, regular cash gives someone the freedom to buy whatever they want and could help them save towards more long-term purchases like a new car or a house deposit.

Sending money through the post can be an easy way to give a gift over the festive period. However, there is always the worry that cards could get lost somewhere along the way before reaching their intended recipient.

The Royal Mail recommends using its Royal Mail Special Delivery Guaranteed service when sending any type of valuable through the post, including money. It ensures your package is tracked to its delivery point and requires a photo and signature upon arrival.

Keep in mind, that if you use this service to send money and something goes wrong, you may also be able to claim compensation for the loss. By contrast, if you send money via the standard post, you won’t have the same level of protection.

No matter how you plan to send cash, it’s always worth making sure any money is packaged securely, and that the envelope does not state there are any valuables inside.

However, with physical cash becoming less common on the high street, and with the inconvenience of having to having to visit a bank to cash the money, some may instead prefer to send cash digitally.

One way to do this is through a bank transfer, which is a free way to move money directly between bank accounts. It can be done online, via app, by phone, or by visiting a branch.

As previously mentioned, a gift card could be a good alternative to a cash gift for your children this Christmas. It requires them to spend the balance in a particular place, or on a specific item, making it seem more like a more traditional present as opposed to cash.

This being said, if your child is under 18 and your goal is to help them save for their future, you may wish to consider their cash gift through a Junior ISA (JISA). While your £3,000 tax limit will still apply, any money saved into this account will be free of income and capital gains tax.

However, it’s worth noting that JISAs are designed to encourage children to save for their future, so your child won’t be able to access this cash gift until they’re 18 years old. It’s also worth noting that you can only deposit a maximum of £9,000 a year into your child’s JISA.