Will I Pay Tax on Gifted Money?
In the UK, gifted money is taxed to prevent people avoiding inheritance tax by giving away all of their money before they die.
You will avoid paying tax on gifted money if any of the following applies:
- You are gifting the money to an exempt beneficiary
- You are gifting less than £3000
- You gift it more than seven years before you die
You can give money to anyone, but gifts to the following beneficiaries are exempt from tax and there is no limit on how much you can give them:
- Your spouse or civil partner (as long as they are permanent residents of the UK)
- A registered UK charity
- A qualifying national organisation such as a museum or a university. You can check which organisations qualify on gov.uk.
How much can I give?
If you want to give money to non-exempt beneficiaries, you can give away £3000 each year before you must pay tax. This annual allowance can be carried forward one year if you do not use it. So, if you make no cash gifts this year, you can give away £6000 next year.
There is no need to declare cash gifts to HMRC if they fall under the £3000 annual allowance.
HMRC rules mean that you must declare and pay tax if you are gifting larger sums of money to non-exempt beneficiaries.
Does it matter when I gift the money?
Yes. Gifts given more than seven years before your death are exempt from inheritance tax.
If you die less than seven years after gifting money, the gift will be subject to inheritance tax, but the amount payable will depend on how much was gifted. If the gift was above the Inheritance Tax threshold of £325,000, your estate will pay tax on the total value of the gift.
If the gift was under the Inheritance Tax threshold, the value of the gift is added to your estate and tax is paid only on the amount over the threshold. This scheme is known as taper relief.
How do I gift the money?
You can give a cash gift by writing a cheque or transferring the money directly into the recipient’s bank account, or by transferring property, for example your home or a car.
Can I gift small amounts of cash?
Yes. Cash gifts of up to £250 can be given tax free to as many people as you like during a tax year. However, if you have used your £3000 annual limit, any gift over £250 will be subject to tax on the entire amount.
You will have to pay tax on small cash gifts of any amount given to someone who has already received your £3000 annual exemption limit.
There are different tax-free allowances on gifts for weddings or civil partnerships, depending on your relationship with the recipient/s:
- Parents can give up to £5000
- Grandparents can give up to £2500
- Anyone else can give up to £1000
Gifts from Taxed Income
If you are giving a gift from your taxed income – as opposed to your savings – this will be exempt from tax. This includes maintenance payments, regular gifts for Christmas, birthdays or anniversaries and premiums of life-insurance policies.