Whether you want to help your children with a house deposit, support your grandchildren or simply pass on some of your wealth while you’re still around to see them enjoy it, gifting money can be incredibly rewarding.
But it often raises an important question: “Can I simply give money away, or could there be an Inheritance Tax bill later?”
There is generally no limit on how much you can give to your children or other family members during your lifetime. However, larger gifts can have Inheritance Tax implications depending on the circumstances and how long you live after making them.
Understanding the rules can help you make gifting part of a considered estate-planning strategy.
How much money can you give away tax-free?
Each tax year, you have an annual exemption of £3,000. This means you can give away a total of £3,000 without it being added to the value of your estate for Inheritance Tax (IHT) purposes.
You can give the full amount to one person or divide it between several people. If you don’t use your full annual exemption, you can carry the unused amount forward for one tax year, but no further.
There is also a small-gift exemption allowing you to give gifts of up to £250 per person to as many people as you wish during the tax year, provided you haven’t used another allowance for the same person.
Importantly, £3,000 isn’t a limit on how much you can give away. Different rules can apply to larger gifts, and different exemptions may also be available depending on the circumstances.
What is the seven-year rule for gifting?
If you make an outright gift to an individual that isn’t covered by an exemption, it will usually be treated as a potentially exempt transfer.
When you survive for seven years after making the gift, it will generally fall outside your estate for Inheritance Tax purposes. However, if you die within seven years, the gift may need to be taken into account when calculating the tax due.
You may also have heard of taper relief. This can reduce the tax payable on certain gifts when the person making the gift dies between three and seven years later. However, taper relief only becomes relevant where the value of relevant gifts exceeds the available IHT tax-free threshold. It reduces the tax due on a gift, rather than reducing the value of the gift itself.
This is one reason why keeping clear records of significant gifts and the dates they were made can be important.
Can you regularly give money from your income?
Another valuable exemption is known as normal expenditure out of income. This can allow you to make gifts from your income without them forming part of your estate for IHT purposes, provided certain conditions are met.
Broadly, the gifts need to form part of your normal expenditure, be made from your income and leave you with enough income to maintain your usual standard of living.
For example, this could include regularly helping with a family member’s living costs or making payments into a child’s savings.
There is no fixed monetary limit for this exemption, which can make it particularly useful in estate planning. However, good record-keeping is critical to demonstrating that the conditions were met.
Are there other gifting allowances?
There are several other exemptions that may be relevant. For example, you can currently give up to £5,000 to a child as a wedding or civil partnership gift, £2,500 to a grandchild or great-grandchild, or £1,000 to another person.
Gifts between spouses or civil partners are generally exempt from IHT, subject to the relevant rules, while gifts to qualifying charities can also be exempt. The exemptions available will depend on the nature of the gift and your individual circumstances.
Should you give money away simply to reduce Inheritance Tax?
Reducing a potential IHT liability can be one reason to consider gifting, but tax shouldn’t be the only consideration.
Once you give money away outright, you normally give up access to it. Before making significant gifts, it’s therefore worth considering how much capital and income you may need throughout your own retirement.
That might include thinking about:
- Your expected retirement income
- Future living costs
- Unexpected expenditure
- The assets you want to retain
- How long your money may need to last
- What you ultimately want to pass to your family
The aim isn’t simply to give away as much as possible. It’s to find a balance between helping the next generation and maintaining your own long-term financial security.
How Galleon Wealth Management can help
Gifting can be a valuable part of estate planning, but the most appropriate approach will depend on your finances, your family and what you want your wealth to achieve.
At Galleon Wealth Management, we can help you consider what you may be able to afford to give away, when gifts might be made and how they could fit alongside your retirement needs and wider estate-planning strategy.
Book an inheritance tax planning meeting to explore tax-efficient ways to pass on your wealth.
This article is for general information only and does not constitute financial or tax advice. Inheritance Tax rules can change, and their application depends on individual circumstances. All information is based on current UK legislation.