If you’re in the privileged position of being able to gift money while you’re still alive, it can be gratifying to see the benefits it brings to your loved ones first-hand. It can also be a good way to reduce the value of your estate for Inheritance Tax (IHT) purposes, so more of your money ends up with your loved ones.

But the tax rules around gifting – like all tax rules – can be complex, subject to individual circumstances and changes that can’t be foreseen. That’s why it’s always advisable to consult with a professional to avoid some common mistakes.

Each of us has an annual ‘gift allowance’ of £3,000 per tax year

How much can I give to my spouse or civil partner tax-free?

As long as you’re married or in a civil partnership, your surviving other half can inherit your entire estate without paying IHT. They, in turn, can add your unused tax-free allowance of £325,000 to their own allowance so that when they die, their IHT allowance could be as much as £650,000.

However, if you’ve left bequests to others in your will or made any lifetime gifts within seven years of your death, your estate may attract IHT, affecting the amount of allowance you can pass on to your partner.

How much can I gift to my children or other loved ones?

Gifting up to £3,000 per year

Each of us has an annual ‘gift allowance’ of £3,000 per tax year. This means you can give away £3,000 worth of assets or cash without incurring IHT if you were to die soon afterwards. But this is the total amount – so if you wanted to gift to your three children, you would need to spread that £3,000 by gifting them £1,000 each.

You can carry forward one year’s annual exemption to the next if you don’t use it – but only for one tax year. For example, if you don’t make any cash gifts from your annual exemption this tax year, you could give away a total of £6,000 next year.

Gifting more than £3,000 per year

As long as you live for seven years after making a gift, your children or other beneficiaries won’t have to pay IHT when you die, no matter how much you gift them. However, if the gift yields an income or any gains, the beneficiary may have to pay Capital Gains Tax (CGT) on that amount.

When you first make the gift, it’s called a Potentially Exempt Transfer, and if you live for seven years, there will be no IHT due on it. But if you were to die within seven years, it changes to a Chargeable Transfer, and IHT will be due.

While we would all hope to live a further seven years after making a gift, we also know there are no guarantees in life, so it’s important you keep a record of what you have gifted, how much and to whom. This will make it easier for the executor of your estate to manage during probate (the process of administering the deceased’s estate).

You can gift any amount to a charity whilst you’re alive without paying tax

What is taper relief?

Any gifts received within seven years of death will incur IHT – but after three years, that amount reduces each year. This is known as taper relief.

For instance, if you die within three years of giving a gift, the beneficiary will need to pay IHT of 40% on that amount (if your estate is over your £325,000 tax-free allowance). The tax payable reduces to 32% after three years, 24% after four years, 16% after five years and 8% after six years.

How much can I gift to a charity?

You can gift any amount to a charity whilst you’re alive without paying tax. For example, if you were to donate £3,000 per year to a charity directly from your salary, you wouldn’t have to pay income tax on the donated amount. So, if you are a 20% tax rate payer you would effectively be paying £2,400 or £1,800 if you pay tax at 40%, because the taxman pays the rest.

To encourage people to leave more money to a charity from their estate, either during their lifetime or in a will, all charitable gifts are exempt from IHT.

In addition, if you were to donate at least 10% of your ‘net estate’ at the date of your death, you can reduce the rate at which IHT is due from 40% down to 36%, potentially reducing any IHT bill by thousands of pounds.

What other gifts can I give tax-free?

Small gifts

You can gift up to £250 per person to as many people as you want. However, you cannot give a small gift to anyone that has already benefitted from your annual £3,000 tax-free allowance in that same year.

Wedding or civil ceremony gifts

As long as the gift is made before the wedding, you can gift your children up to £5,000, a grandchild or great-grandchild up to £2,500 and another relative or friend up to £1,000 without incurring IHT.

Living costs

Regular gifts to help with living costs, given to an ex-partner, elderly parent or child under 18 or in full-time education, may be exempt from IHT in certain situations. For example:

  • Maintenance for your ex-husband, ex-wife or civil partner
  • Maintenance for relatives who depend on you, such as elderly parents
  • Maintenance for children under 18 or in full-time education
  • Paying into your child’s savings account
  • Grandparents paying for their children’s school fees
  • Premiums on life insurance policies

It’s important to seek advice

Gifting and tax relief is a complicated area. If you don’t know the rules and allowances, it’s very easy to make costly mis-steps, potentially leaving your loved ones with an unexpected tax bill to pay if you were to die.

An Amber River financial planner can offer advice on the tax implications of gifting, alongside other matters relating to estate planning. This could include planning your will, IHT, tax-efficient investments, trusts and lump-sum arrangements, care home and later-life planning.

Get in touch

To speak to one of our team, arrange an appointment or find out more, call 0800 915 0000, or alternatively use our contact form here.