Gifting money to children and other family members – rules to remember

2 minutes

Gifting money to family, children and grandchildren is your way of getting them off to a secure start in their lives.

Recipients can use the money to put down a deposit on a new home or to pay for their studies. Giving these generous gifts before you pass on is your way of seeing loved ones make the best use of your legacy. But it’s subject to laws governing Inheritance Tax. Find out how you can ensure you’re not breaking the rules while still making sure your family members benefit.
  • What are inheritance tax gifts?
  • How much money can you gift tax-free?
  • What are ‘potentially exempt transfers’?
  • Alternatives to inheritance tax gifts

When should you help your children and other family members?

What are inheritance tax gifts?

A slight misnomer, these are gifts you can give to children, grandchildren or other family members later in life. It could be money, belongings or even property. The link with inheritance tax is whether or not they receive the gift within seven years of your death. Under certain limits like amounts and number of beneficiaries, you can make tax-free gifts whenever you want to ensure your loved ones reap the benefits of your legacy.

The Inheritance Tax threshold – below which no tax is due – is £325,000. Any proceeds above that amount are taxed at 40%.

To reduce the amount of tax due and ensure there’s more leftover for your surviving family, you can make use of tax-free gifting and alternative ways to hold your legacy.

How much money can you gift tax-free?

The seven-year rule states that if you live for seven years after making a financial gift, no Inheritance Tax is due. (A sliding scale applies on gifts given above the annual exemption within seven years.)

By making gifts while you’re alive, rather than leaving money to family members in your Will, you can follow the rules around Inheritance Tax and live to see your loved ones making the most of your generosity.

There are many different types of gift, each of which comes with its own rules about eligibility.

Annual exemptions

Each tax year, you receive an ‘annual exemption’, which allows you to gift a combined total of £3,000 tax-free between children, grandchildren and other members of your extended family. Anything from your annual exemption which you don’t use can roll over for one year only.

Small gift allowances

You can make as many donations as you like of up to £250 per person in a single tax year, provided those people didn’t also benefit from your £3,000 annual exemption allowance.

Gifts for weddings and civil partnerships

You can help make a family member’s big day with a donation of:

  • £5,000 to a child
  • £2,500 to a grandchild or great-grandchild
  • £1,000 to any other person

This gift can be given on top of money from your annual exemption but not from a small gift allowance.

You can also make regular allowances to someone’s living costs, provided they’re paid from a regular income and you can show it doesn’t affect your circumstances.

What are ‘potentially exempt transfers’?

If you’re giving someone a gift from your estate with a value above the annual exemption, the seven-year rule applies. If you give the gift and pass away within seven years, then for tax purposes the gift is considered to be part of your estate and will be taxed as such.

The reason they’re “potentially” exempt is that whether or not the transfer is exempt depends on whether you live for seven years after you’ve imparted the gift. Gifts made more than seven years before you pass away, above the annual exemption, are not subject to Inheritance Tax. These can be of any value.

Alternatives to inheritance tax gifts

As well as gifting money to family, there are other ways to take care of them in future.

Life insurance

With careful planning, your family members could use the pay-out from a life insurance policy following your death to pay the Inheritance Tax bill. To ensure that the proceeds go directly to your family and isn’t added to your estate (and therefore potentially adding to the taxable amount), you can write a policy in trust.

Junior ISA

Younger recipients would benefit from investing tax-free in a Junior ISA. It’ll require their parent/guardian’s help to set up, but it’s a good way to hold money in trust until they turn 18.

For more information about Inheritance Tax and gifting, read our guide.