Why is giving money away taxed?
In a nutshell, to prevent people from avoiding inheritance tax by giving all their money away before they die.
This does not mean you cannot make a gift of money at all, but the tax system is designed to ensure that you are not able to give away large sums of money (either in one go, or through smaller, regular gifts) without paying tax.
What is inheritance tax?
In effect, the estate of the deceased pays the tax.
Inheritance tax is assessed and paid by the whole estate, anyone who receives anything from the Will gets their share of the estate after tax.
Inheritance tax is paid on someone's estate when they die if it is worth more than £325,000.
A person's estate includes any money they had in the bank, property they owned, investments they held and their possessions.
Inheritance tax is only payable on any portion of that estate that is above a threshold of £325,000, and is charged at 40%, however this is reduced to 36% if you donate 10% or more of the estate to charity.
Do you always have to pay inheritance tax?
No, there are a number of exceptions that enable gifts of money to be given, without tax being liable. Those exceptions break down according to who is given the money, why it is given, the total amount you give away each year and how long you live after giving money away as a gift. They break down as follows:
1. Gifts to "exempt beneficiaries"
You can give as much money as you like to certain people and organisations without paying Inheritance Tax. This applies whether you give money whilst living or after your death, via your will. Exempt beneficiaries include:
Your husband, wife or civil partner, provided they live permanently in the UK
Charities registered in the UK - to check which charities qualify, visit the GOV.UK website
Some national organisations like universities, museums and the National Trust
NOTE that gifts to unmarried partners or unregistered civil partners are not exempt from Inheritance Tax.
2. Your Annual Exemption
You are allowed to give away a total of £3,000 each year, without any tax implications after your death.
Bear in mind that this is the total annual amount that you can give away, NOT a total amount you can give to each beneficiary, each year.
It is also worth noting that your Annual Exemption can be carried forward for one year if it has not been used.
In other words, if you did not make any gifts of money during last year, you can give away a total of £6,000 this year. Equally, if you gave away £1,500 last year, you will be able to give away a total of £4,500 this year.
The Annual Exemption cannot be carried forward by more than one year.
3. Giving small cash gifts
In addition to the exemptions above, you can give away small gifts of up to £250 to as many people as you like in one tax year.
However, some points to remember include:
You cannot make a gift of more than £250, and claim exemption on the first £250 - larger gifts are treated differently
You cannot combine the small gifts exemption with another exemption when giving money to one person. In other words, you cannot give one person £3,250 and claim exemption based on a combination of the small gifts and 'Annual' exemption
4. Wedding gifts
Provided that you give or promise to give a cash gift on or shortly before the ceremony, you can make quite large cash gifts as wedding or civil partnership presents without being liable for Inheritance Tax. The limits on such gifts depend on your relationship with the recipient:
If you are a parent you can give up to £5,000 tax free
Grandparents can give up to £2,500
Anyone else can give up to £1,000
Remember, however, that if the wedding or civil partnership is called off and you still give the gift, it will NOT be exempt from Inheritance Tax.
5. Regular gifts or payments
Any gifts that are part of your normal expenditure, are exempt - provided they are made from your after tax income (not your savings) and that you have enough money left over to maintain your lifestyle. These exempt payments include:
Maintenance for your husband, wife, civil partner
Maintenance for your ex-husband, ex-wife or former civil partner
Maintenance for relatives who depend on you
Maintenance for your children, adopted children or step-children, as long as they are under 18 or in full-time education
Monthly or regular payments to anyone
Regular gifts for Christmas, birthdays or wedding/civil partnership anniversaries
Premiums on life insurance policies
Does when I give money as a gift matter?
Yes, though this rule really only makes a practical difference for the elderly and people who are terminally or seriously ill.
That is, any gift given more than seven years before your death is automatically exempt from Inheritance Tax.
In addition, any gift given between three and seven years before your death will be liable for Inheritance Tax at a reduced rate - this is known as 'Taper Relief'.
How is inheritance tax paid on gifts?
If a gift is given less than seven years before the death of the 'giver', the tax depends on the value of the gift. There are two possible scenarios:
If the gift is worth less than the Inheritance Tax threshold (£325,000), then the value of the gift will be added to the deceased's estate, with any tax paid by the estate prior to any inheritances being paid out
If the gift is worth more than the Inheritance Tax threshold, then the recipient (or a representative of the deceased's estate) will have to pay Inheritance Tax on the total value of the gift.
Remember: These rules only apply to gifts not covered by the exemptions already described above.
Gifting money FAQs
What ways can I give a tax free gift?
You can gift cash by paying it into a bank account, writing a cheque, or by transferring property.
Do I need to declare cash gifts to HMRC?
No, as long as it falls under the £3,000 annual allowance, you do not need to declare it.
Can I gift money in my will without paying Inheritance Tax?
Yes, Inheritance Tax is only payable if your estate is worth more than £325,000. Anything under this amount will not be taxed.