How much money can I gift before being taxed?

Many people are choosing to write a Will or review their estate planning in the current circumstances. We take a look at the options for bestowing gifts, either to family or others, or to charity.

What are the rules for gifting money to family members?

Modest gifts

You can give away up to £3,000 worth of gifts each tax year (6 April to 5 April). This is known as your ‘annual exemption’. You can carry any unused annual exemption forward to the next year – but only for one year.

Separately, you can give as many gifts of up to £250 per person (‘small gift allowance’) as you want during the tax year, as long as you have not used another exemption for the same person.

Gifts for weddings or civil partnerships

You can give a tax-free gift to someone who is getting married or starting a civil partnership. You can give up to:

£5,000 to a child

£2,500 to a grandchild or great-grandchild

£1,000 to any other person

If you’re giving gifts to the same person, you can combine a wedding gift allowance with any other allowance, except for the small gift allowance.

Surplus income gifting

There is no limit to surplus income gifting, but your executor will need to be able to provide evidence of your income and expenditure, and be able to show that you have made a conscious decision to give money away regularly. Your executor will also need to evidence that you gave away income, rather than capital or savings.

Some of the older generations could be in a position to use this exemption, as their expenditure may have dipped due to; a new lifestyle after retiring while income from pensions, dividends, and rentals has broadly stayed the same. They can use surplus income giving, in addition to modest capital gifting, to help out family members who may be struggling.

What is the best way to give money to a charity?

Many charities have suffered greatly through the COVID and Cost-Of-Living Crisis, as have the arts, museums, universities, and amateur sports clubs.

Gifts to charities are exempt from inheritance tax and do not adversely affect your tax position on death, as they do not eat into your estate’s nil rate band (or Inheritance Tax Threshold). This amount is taxed at 0% or nil, unless there are lifetime gifts to chargeable beneficiaries, or a trust, which may affect the overall taxation on death.

An allied benefit of gifts to charity is that you can claim Gift Aid, not just for payments in the current tax year but also in the previous tax year. Charitable causes benefit as they can claim an extra 25p for every £1 you give, without costing you any extra. Your donations will qualify as long as they’re not more than four times what you have paid in tax in that tax year.

If your employer, company, or personal pension provider runs a payroll giving scheme, you can donate straight from your pay or pension, before tax is deducted.

Valuable items

If you have valuable items in your estate, for example works of art or jewellery, you can give these to charitable causes.

More controlled charitable gifting

A further option to donate on a more personal, controlled, level is to set up your own charitable trust, charitable company or Charitable Incorporated Organisation. These enable you to focus your giving, and work alongside other trustees who can continue after your death.

Local Community Foundations are also a cost-effective source of achieving your charitable aims, but within the wrapper of the foundation dealing with the compliance and regulation.

Gifts that continue to be included in your estate for a time after the gift is made

Larger gifts

You can gift more than your annual allowance of £3,000. The effect is that you have the ‘seven-year rule’, meaning that, if you die within seven years, then the gifting is taken into consideration against your basic inheritance tax threshold of £325,000 known as the nil-rate band (NRB).

Example:

You gift £131,000 to your goddaughter May 2020

You die more than four years after the gift but less than five years; June 2024

£6,000 can be claimed by your Personal Representatives as your annual exemptions as you had not made any other gifts in the tax year of the gift or the previous tax year.

So, the £125,000 remaining (£131,000 - £6,000) is deducted from your NRB of £325,000, meaning that less is available to be taxed at 0% within your estate on death (only £200,000 rather than £325,000 of your estate is taxed at 0%).

The recipient of the gift (here the goddaughter) is not liable to inheritance tax unless your gift exceeds your NRB (either alone of when combined with previous gifting in that seven-year window pre death).  If this happens taper relief may apply to reduce the rate of tax on the gift.

Using the same example above but changing the amounts.

• You gift £531,000 to your goddaughter May 2020.
• You die more than four years after the gift but less than five years; June 2024.

£6,000 can be claimed by your Personal Representatives as your annual exemptions as you had not made any other gifts in the tax year of the gift or the previous tax year).

So, the £525,000 remaining (£531,000 - £6,000) is deducted from your NRB of £325,000, meaning that all your NRB is utilised (£325,000 -£525,000 = -£200,000) and nothing remains available to your estate. In addition, £200,000 of the gift itself is now liable to inheritance tax, which will be payable by the recipient following your death. Your goddaughter will pay inheritance tax on £200,000, but at the tapered tax rate of 24% rather than 40% because the gift was made between 4 and 5 years before the date of death (so her tax bill will be £48,000).

There could also be a benefit in making larger gifts to family or others now, if a number of your assets have fallen in value due to COVID. Any future gain would then be in the hands of the recipient; and not in your estate to be taxed on death. You need to consider and get advice on Capital Gains Tax when disposing of an asset in specie (such as shares, antiques, property) before making any gifts of specific assets rather than cash gifts.

What is a Deathbed gift?

Some people make ‘deathbed’ gifts, when they are close to death and know they will not have the need of funds and are seeking to keep their estates below a certain value.

If you die and your estate is worth more than the basic inheritance tax threshold of £325,000 known as the nil-rate band (NRB), your estate may qualify for the residence nil-rate band (RNRB) if you leave your home to your descendants. Both of NRB and RNRB are frozen in value until 5 April 2026.

The maximum available RNRB currently available is £175,000. The RNRB will gradually reduce, or taper away, if your estate is worth more than £2 million, even if you leave your home to your direct descendants. The RNRB available to these more valuable estates reduces by £1 for every £2 that the estate is worth more than the £2 million taper threshold.

Deathbed giving is a way to keep the value of your estate below the £2 million taper threshold applied in relation to the RNRB. Of course, the gift itself is likely to still be included in the calculation of inheritance tax payable on your estate, under the “seven-year rule” discussed above, so it’s recommended to seek professional advice.

Trusts – Is a Trust worth the money?

If you would like to retain a degree of control over your gifts, a trust can work well. Those who manage or administer the assets, known as trustees, are separate from those who use or benefit from them. Trustees control; and beneficiaries’ benefit.

Using a Trust will let you control how your assets should be distributed, to who, and when. This means that you can leave guidance for your Trustees to release funds to your Beneficiaries at intervals, or after a period of time, or for minors, once they have come of age.  However, Trusts are usually taxed differently to gifts, so it is worth taking professional advice before setting one up.

Previous 2022 version: I’d like to give money to my family or charity before I die. What’s the best way to do this? - UK (advisingfamilies.org)