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

There are many reasons you may want to give a cash gift to your loved ones. It could be to help pay for a wedding, a new car or university fees, or to help give the younger generation a leg-up onto the property ladder. Others want to gift cash to reduce the value of their estate for inheritance tax (IHT) purposes, with tax on cash gifts often being far less than the 40% IHT charge that many are facing.

But, before you empty your savings account and hand over the cheque, there are a few things you need to be aware of, as it isn’t always that simple to give cash gifts to children. Read on to get an understanding of the rules, and to find out how much of a cash gift is tax-free.

Essentially, you can give as much as you like – but if you want to ensure it’s tax-free, you’ll need to consider both how much you give, and when you give it.

Everyone gets an annual gifting limit of £3,000 that’s exempt from IHT. Any unused exemption can be carried forward to the next year, but only for one year. Alongside that, it’s possible to give smaller gifts of up to £250 to as many people as you like, as long as they haven’t already received your £3,000 annual exception.

You could also give cash as a wedding present – provided it’s given before the wedding – but here, the level of tax on cash gifts in the UK depends on your relationship to the recipient. For example, while you’re only allowed to give £1,000 as a wedding gift to someone not directly related to you, this rises to £2,500 if it’s to a grandchild and £5,000 to a child, so those looking to transfer some of their wealth may want to consider being particularly generous when their child gets married.

This depends on several different factors, but at its most basic level, you can gift your children up to £3,000 a year without it being subject to tax. In addition to weddings, cash gifts given at Christmas and birthdays also aren’t taxed, provided you’re not reducing your standard of living by giving the money.

Above these limits, you’re still able to gift more, but the timing becomes essential. This is because of the seven-year rule, which states that tax is not due on any of your gifts if you live more than seven years after it’s been given. The rule also only applies if the total value of the gifts made at least seven years before you die exceeds the £325,000 tax-free allowance.

The standard level of IHT for any assets worth over £325,000 (your nil rate band) is 40%. However, as mentioned, it’s possible to avoid this through the seven-year rule. This is also known as a Potentially Exempt Transfer, which changes to a Chargeable Transfer if you die within that seven year period.  

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.

Essentially, if you give away more than £325,000 in the seven years before you die, your beneficiaries will be liable to pay IHT. If you live longer than seven years, they won’t.

It’s also worth remembering that IHT only comes into play on assets worth more than £325,000, including your property. If your estate is worth less than this, you can give away as much as you like, and your beneficiaries won’t be charged no matter how long you live. If your estate is worth over £325,000 and is liable for IHT even before your gifts are considered, any chargeable gifts may be subject to IHT if you die within seven years.

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 is 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.

However, you’ll have 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 truly regular, too, so it’s something you’ll need to commit to if you want to make the most of this exemption.

Those receiving cash gifts may also be wondering if they have to pay tax on it. Here, the rules are bit simpler – HMRC doesn’t count cash gifts as income, so you won’t have to pay any income tax on cash gifts received from parents (or grandparents for that matter). However, if you make any income from that gift, even if it’s interest earned in a savings account, you may be liable to pay tax on it. You may have to declare this additional income on a tax return, and could expect to pay income or capital gains tax on the amount.

Setting up a children’s savings account or Junior ISA for a child under the age of 18 could be another option, allowing you to regularly pay into their savings pot. Or, you may want to look into transferring property, perhaps a house or car, into your recipient’s name. However, in this case you’ll need to be careful that you don’t still have an interest in the gift – if you transfer your home to your child but continue to live in it, for example, it will still be viewed as part of your estate and will therefore be subject to IHT.

There’s no set rule to this as it depends on individual circumstances, but 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, which could dramatically reduce the inheritance tax charge 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.

However, you may also need to think about capital gains tax 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. Bear in mind, too, that your needs and financial circumstances may change over the years, and you may find you have additional costs that your property can no longer help cover. 

Depending on the value of your estate, you may not need to gift your property beforehand for it to be advantageous – if you’re leaving your home to your children or grandchildren, the tax-free threshold rises to £500,000 (up from £325,000), so provided your home and any additional assets are below this level, your beneficiaries may not have any IHT to pay on your death. However, rising house prices mean an increasing number of people are coming under the IHT bracket, 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.

If you don’t have the cash currently available but are a homeowner and over the age of 55, you could consider equity release. This would release some of the cash tied up in your home to then offer as a gift. However, you’ll then be liable for interest payments which could surpass any IHT charges you may have otherwise owed.

To read more about how equity release works, read our guide.