How much can you give as a cash gift and how is tax affected?

Many people want to gift cash to their loved ones, whether that’s to help pay for a house deposit, a wedding or university fees, for example. Those giving away their money may also hope to minimise the Inheritance Tax (IHT) that may be charged on their estate after they’ve passed away.

But, before giving away your money, it’s important to understand the rules and allowances on cash gifts in the UK.

How much can you gift tax-free?

As long as you live longer than seven years after giving away any cash or other assets (such as jewellery, valuables, property or shares), you won’t need to pay any Inheritance Tax (IHT) on it under current UK rules. This is known as the “seven-year rule”.

However, if you die within the seven years, the cash gift may be subject to Inheritance Tax, explained below.

But there are still plenty of opportunities to give away your cash or other assets without worrying about tax implications. Everyone has the following tax-free gift allowances:

• Annual exemption. This allows you to give away up to £3,000 per year without any tax implications. You can give the full allowance to one person or split it between multiple people. If you don’t use up your allowance in one tax-year, you can carry it over to the next one, which means the maximum you could give in a single tax-year using this allowance is £6,000.
• Weddings or civil partnerships. Parents can give up to £5,000 tax-free to their child for their wedding or civil partnership, while grandparents and great-grandparents can give up to £2,500 tax-free. Any other individuals can give up to £1,000 tax-free. This allowance can be combined with the annual exemption.
• Small gift allowance. There’s no limit on the number of people to whom you can give cash gifts worth up to £250 in a tax-year (as long as you haven’t used a different gift allowance on the same person).
• Christmas and birthday gifts. Any cash you give out of your regular income for these special events are exempt from Inheritance Tax. Read more on giving cash at Christmas.
• Normal expenditure out of income. You’re allowed to give away cash on a regular basis without worrying about Inheritance Tax implications, as long as the money comes from your regular income and you can continue to afford your standard living expenses. These payments could be used to help a child or relative with their living costs, for example.

If you give more than these allowances, the sum over the allowance limit may be subject to Inheritance Tax if you die within seven years of making the gift.

Giving a regular sum from your income

The tax implications of gifting small, regular sums from your own income are different. In this case, if you’re working and pay income tax, the gift will be tax-free if it doesn’t affect your standard of living. HMRC should be happy that you’ve already paid tax on the money and are therefore free to spend it as you like, with neither you nor the recipient liable for any additional tax payments.

You’ll need to make sure you can prove that these small regular gifts come out of your income, not your savings, and they mustn’t significantly impact your own standard of living. They need to be regular (such as monthly or quarterly, for example), not a one-off or sporadic payment, so it’s something you’ll need to commit to if you want to make the most of this exemption.

How much can you gift your child or grandchild?

You can legally give your child, grandchild or other family member as much as you like — there’s no set maximum.

However, if you want to ensure the gift is completely tax-free, you’ll need to consider both how much you give, and when you give it.

How much can you gift your child tax-free?

There are a range of allowances (explained above) that allow you to give cash to your child at any time without any tax implications.

The annual allowance allows you to give up to £3,000 tax-free in a single year, or a maximum of £6,000 if you carry over your full allowance from the previous tax-year.

And, if your child is getting married, you can also give up to £5,000 in addition to the annual allowance. This means you could theoretically give your child a maximum of £11,000 without any tax implications in a single tax-year.

Additionally, if you have surplus income, you could choose to regularly give your child a cash sum monthly or on a regular basis. This can be used alongside the annual allowance or wedding gift allowance.

While you can give your child more than this, any gifts you make outside of these allowances may be subject to Inheritance Tax if:

• you die within seven years of making the gift
• the total value of the gifts you’ve made (including money and any other assets) in the past seven years is worth more than £325,000.

Inheritance Tax and cash gifts – how much could my beneficiaries have to pay?

If you give away more than £325,000 worth of gifts in the seven years before you die, Inheritance Tax may be charged.

The standard level of Inheritance Tax is 40%. However, as mentioned, it’s possible to avoid this through the seven-year rule.

Any gifts you make are known as Potentially Exempt Transfers (PET). If you live for seven or more years after making these gifts, no Inheritance Tax is due. But, if you die with seven years, these transfers become Chargeable Transfers.

In this case, IHT will be charged at 40% on gifts given in the three years before your death, with a sliding scale of tax applied on gifts given between the preceding three and seven years. This is known as taper relief.

It’s also worth remembering that IHT only comes into play on assets worth more than £325,000, including your property.

When calculating the value of someone’s estate, the gifts they made are typically added first and use up the IHT tax-free threshold before any other assets and property the individual has left.

Who pays Inheritance Tax?

In most cases, the deceased person’s estate will need to pay any Inheritance Tax that’s due.

However, if someone receives a gift that is subject to Inheritance Tax, they will need to pay this tax themselves.

Do you need to declare cash gifts to HMRC?

If you receive a cash gift, you don’t usually need to declare it to HMRC.

But, if you make a profit on any gifts you receive, you will need to report this to HMRC. For example, if you receive a property or some shares and sell them for a profit, you may need to pay Capital Gains Tax (CGT).

Executors managing someone’s estate will need to declare any gifts the individual made in the last seven years, even if no Inheritance Tax is due on them.

Do you pay income tax on cash gifts in the UK?

Those receiving cash gifts may be wondering if they have to pay tax on it. Here, the rules are bit simpler. Because HMRC doesn’t count cash gifts as income, you don’t usually need to pay any income tax on gifts received from parents, grandparents or any other friends and relatives.

However, if you earn any income from that gift, even if it’s simply interest earned in a savings account, you may be liable to pay tax on it if it takes the total interest you earn on your savings above your Personal Savings Allowance (PSA). You may have to declare this additional income on a tax return and pay income tax on the amount.

You won’t need to pay income tax if you put the money into an ISA as any interest earned on these accounts is tax-free.

Ways to give money to children

It’s never too early to build up a savings pot for your children or grandchildren. There are many ways you can give money to children so they have a sum of money to draw on once they’re older, to help pay for a car, a house, studying or even retirement.

• Junior ISAs (JISA). Parents and guardians can open a Junior ISA for their child, and anyone is able to add money to it. The maximum amount you can put in a JISA in a tax-year is £9,000 and, as with all ISAs, the interest earned is exempt from income tax. Children can access the money in their account once they turn 18. Find out more about Junior ISAs.
• Stocks and Shares Junior ISA. As well as (or instead of) a cash Junior ISA, parents and guardians could open a Stocks and Shares JISA. This is similar to a cash JISA, but the money is invested instead of earning interest. Bear in mind that investments could go down in value as well as going up.
• Children’s savings accounts. You could also open and pay into a children’s savings account and earn interest on the money you give. However, bear in mind that, if the money given by a parent earns more than £100 in interest per year, this will be counted towards the parent’s savings income and could be taxed if their total savings interest is above the Personal Savings Allowance (PSA). See our chart for more information and to compare children’s savings accounts.
• Premium Bonds. Anyone can buy Premium Bonds on behalf of a child, which will be managed by the child’s parent or guardian until they turn 16. Every £1 bond you buy is entered into a monthly draw, with the chance to win prizes ranging from £25 to £1 million. Read more on Premium Bonds vs savings accounts.
• Pensions. For even longer-term planning, parents and guardians can open a Junior Self-Invested Personal Pension (SIPP) for their child, ready for when the child reaches retirement age. Anyone can add to the pension, up to the Junior SIPP allowance (which is £3,600 in the current tax-year). This allowance includes 20% tax relief, which means you only need to contribute up to £2,800 to max out the allowance.

Is it better to gift or inherit property?

There’s no fixed answer as to whether it’s better to gift someone property or leave it to them as inheritance. It depends on your individual circumstances.

In some cases, if you’ve got the means to do so, it could make sense to gift the property before you die rather than leaving it for your children to inherit. This is because, once it’s been passed to your children, it no longer forms part of your estate (unless you die within seven years of giving it away), which could dramatically reduce the Inheritance Tax charged on your death.

For it to be beneficial, you need to live longer than seven years after gifting the property, otherwise it will still be counted as part of your estate (though the tax charge will be on a sliding scale depending on how long before your death the property was given). You also need to be able to completely move out of the property, or pay a full market rent, for it to be deemed a gift.

If you continue to live in the property without paying market rent, it will usually continue to be classed as part of your estate.

Moreover, bear in mind that if you sell your property to a family member for less than its market value, the difference in price will be classed as a gift.

When giving property, you may also need to think about Capital Gains Tax (CGT) if it wasn’t your main residence (if the property was a buy-to-let, for example), which could reduce some of the tax advantages of gifting the property. Additionally, it’s important to think about how your needs and financial circumstances may change over the years, and what the consequences of giving away your property could be.

Depending on the value of your estate, you may not necessarily need to gift your property beforehand to get any tax benefits.

For example, if you’re leaving your home to your children or grandchildren, the tax-free threshold rises to £500,000 (if your estate is worth less than £2 million), so, provided your home and any additional assets are below this level, your beneficiaries may not have any Inheritance Tax to pay on your death.

However, higher house prices mean an increasing number of people are exceeding this threshold, so if you’re considering gifting a property to reduce the value of your estate, it’s vital to discuss it with a financial adviser to ensure you follow the correct procedure.