When it comes to gifting money to family members, whether for a birthday, wedding, or simply to help, many are unaware of the potential tax implications. Thankfully, there are tax-free gift allowances that allow you to gift money without incurring a hefty tax bill. However, it’s important to know the rules and limits so that you don’t unintentionally fall foul of HMRC’s gift regulations.
Here’s your guide to gifting money to family members, including how much you can give tax-free and when you might need to declare the gift to HMRC.
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How much money can you gift to family members tax-free in the UK?
You can gift money to family members without having to pay tax, but there are certain limits depending on the circumstances. Understanding these limits is essential to avoid any tax charges.
- Annual gift allowance: You can gift up to £3,000 each tax year (from April to April) without any inheritance tax, and if you don’t use the full allowance, you can carry it over to the following year – but only for one tax year.
- Small gifts: You can also give gifts worth up to £250 to as many people as you like throughout the year, provided you haven’t used the annual £3,000 allowance on them.
- Wedding and civil partnership gifts: If you’re gifting money to family members for a wedding or civil partnership, there are additional exemptions. Parents can gift up to £5,000, grandparents can gift £2,500, and anyone else can gift £1,000 without incurring tax.
- Gifts out of income: If you’re regularly gifting money out of your income (and it doesn’t affect your standard of living), this may not be subject to inheritance tax. However, it’s crucial to keep records of these gifts to show that they were made from surplus income.
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Do I need to declare cash gifts to HMRC?
While many gifts are exempt from tax, some may need to be declared to HMRC if they exceed the annual limit or if they are made outside of the normal gift allowances.
If you give more than £3,000 in a tax year, it’s essential to keep track of the gifts and declare them to HMRC if necessary. Gifts that exceed the tax-free allowance might be subject to inheritance tax if the giver passes away within seven years of the gift. This is known as the “seven-year rule,” and it’s important to be mindful of it when gifting large sums of money.
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When do I need to declare a gift to HMRC?
- Gift exceeds £3,000: If you give over the £3,000 allowance, the excess may be subject to inheritance tax.
- Gift is part of an estate: If you’re gifting as part of estate planning (such as for a will or family trust), and the gift exceeds the tax-free limit, it must be reported.
For gifts given that fall outside the normal allowance but are exempt from immediate tax, you don’t need to declare them unless they are part of your estate planning. It’s best to keep a record, especially if there are multiple gifts.
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Can a power of attorney gift money to family members?
If you have been granted power of attorney (POA) for a family member, you may be wondering whether you can gift money on their behalf. The short answer is yes, but there are conditions to keep in mind.
Here’s how it works:
- If you hold a lasting power of attorney (LPA) for someone, you can gift money on their behalf, but only if the gift is deemed reasonable and in line with the person’s wishes. The amount gifted must not be excessive and should be within the individual’s means.
- It is essential that you make gifts that align with the family member’s best interests. For example, gifts made to pay for their care or support may be permissible, but gifts made for other reasons could be questioned by the court.
If you are unsure about the rules or what is permissible, it’s always best to consult a solicitor or financial advisor to ensure you’re acting in accordance with the law.
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When should you seek professional advice on gifting money?
While gifting money to family members can be a thoughtful way to pass on your wealth, it’s essential to ensure you’re following the correct procedures. Here are a few times when you might want to seek professional advice:
- Large gifts: If you’re gifting a significant amount of money or assets, it’s worth seeking legal or tax advice to ensure there are no future tax implications.
- Inheritance planning: If you’re looking at gifting as part of your broader estate or inheritance planning, a professional can help you understand the tax advantages and disadvantages of different gifting strategies.
- Power of attorney gifts: If you’re acting under a power of attorney, professional advice can help you understand your responsibilities and ensure that you are acting in the best interests of the person for whom you have the power.
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Things to remember when gifting money to family
- You can gift up to £3,000 tax-free each year, with the option to carry forward unused allowances.
- You can also give small gifts worth £250 each to as many people as you like without tax implications.
- Gifts for weddings or civil partnerships have additional tax-free exemptions, ranging from £1,000 to £5,000 depending on your relationship with the recipient.
- If gifts exceed the annual exemption limits or fall under the seven-year rule, they may be subject to inheritance tax.
- Always keep a record of gifts and seek professional advice if you’re unsure about the tax implications.
At Ellis & Co, we understand that making the right decisions when it comes to gifting money to family members is important. Our experienced team can guide you, so you make informed decisions regarding your assets and wealth. Get in touch with your local Ellis & Co branch for tailored advice today.
