A Guide to Gifting Money at Christmas

Christmas is the season of giving, and for many, it’s an opportunity to make a meaningful impact on the lives of loved ones. Beyond the charm of wrapped presents, monetary gifts can offer long-term benefits, helping younger generations save for education, buy a home, or invest in their future. However, ensuring that your generosity aligns with UK financial rules and tax regulations is essential for maximising the impact of your gifts.

Understanding the rules surrounding gifting is not just a matter of legal compliance—it’s the key to making your financial presents as effective and worry-free as possible. This guide will walk you through the essentials of gifting money in the UK, helping you make informed and confident choices this festive season.

With proper planning, your holiday generosity can bring both immediate joy and lasting financial security to your family. Here’s what you need to know to make your monetary gifts count without unintended tax implications.

How Much Money Can I Gift My Children?

You can technically gift as much money as you wish to your children or grandchildren. However, the amount you gift, and the timing of your generosity can have an impact on the Inheritance Tax position of your estate further down the line.

The annual tax-free gifting allowance enables you to give up to £3,000 per year without it being subject to Inheritance Tax (IHT). If you didn’t use last year’s allowance, you can combine it to gift up to £6,000 this tax year.

It is also worth keeping the seven year rule in mind when gifting – especially if you are gifting significant sums or assets. If you live for more than seven years after making a gift, no IHT will be due on the respective gift but care is needed, as in certain circumstances, gifts going back up to 14 years can be caught.  Advice on the order of gifting is really important.

What Are the Rules Surrounding Gifting Money?

HMRC allows for several exemptions that make gifting money tax-efficient:

• Small Gift Exemption: You can give up to £250 to as many individuals as you like, provided they haven’t already benefited from your annual £3,000 exemption.
• Wedding or Civil Partnership Gifts: Parents can gift up to £5,000 tax-free to their children, grandparents can give £2,500, and anyone else can gift £1,000.
• Regular Contributions from Income: If you can show that gifting money regularly doesn’t impact your standard of living, those gifts are tax-free. Examples include paying for school fees or rent.

What is Gift Tax?

In the UK, there isn’t a specific “gift tax” in the way some countries define it. However, monetary gifts are considered under the umbrella of IHT. As we previously mentioned, if you pass away within seven years of giving a gift, it may be liable to IHT depending on the total value of your estate and the timing of the gift.

Which Gifts Are Tax-Free?

Some gifts are fully exempt from tax:

• Gifts to Spouses or Civil Partners: You can gift unlimited amounts to your spouse or civil partner tax-free if they are UK residents.
• Charitable Donations: Donations to charity IHT exempt.

What Are Potentially Exempt Transfers (PETs)?

Potentially Exempt Transfers are gifts that may become exempt from tax, depending on how long you live after giving them. Taper relief reduces the tax rate on gifts made three to seven years before your death.  It’s really important to note that Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold.

Reducing Inheritance Tax for Your Loved Ones

To minimise the inheritance tax burden on your family:

1. Start Early: Regular gifting using annual exemptions reduces the size of your taxable estate over time.
2. Gift High-Value Assets: If you own valuable items, consider transferring them to loved ones, but be aware of potential capital gains tax on disposal.
3. Plan for Property: Leaving a home to direct descendants can leverage the Residence Nil-Rate Band, currently £175,000 per person, in addition to the standard £325,000 IHT threshold.
4. Keep Records: Document all gifts and their timing to help executors manage your estate and comply with HMRC rules.

FAQs

Can I Give £3,000 to Each Child I Have?
No, the £3,000 annual exemption applies to you, not your recipients. You can divide it among children or double it to £6,000 if your spouse also gifts.

What’s the Best Way for Grandparents to Gift Money?
Contributing to living expenses, Junior ISAs, or setting up a trust are common approaches. Tailor the method to your grandchildren’s needs and your financial goals.

Do I Need to Declare Cash Gifts to HMRC?
No declaration is required for gifts within the £3,000 allowance or covered by exemptions. For larger gifts, recipients may face IHT if you pass within seven years.

Will HMRC Find Out About Gifts After Someone Dies?
Yes, executors must report gifts made within seven years to ensure accurate IHT calculations.

Are All Gifts Subject to the Seven-Year Rule?
No. Tax-free gifts such as those within the £3,000 exemption or to a spouse/charity are not subject to this rule.

Can My Child Be a Beneficiary of My Life Insurance?
Yes, but children under 18 will need a guardian to manage the payout. Consider writing the policy in trust to prevent it from counting towards your estate.

This Christmas, consider how gifting money can create lasting impacts for your loved ones. By understanding the rules and planning strategically, you can spread joy and ensure your family benefits from your generosity in the most tax-efficient way. If in doubt, consult a financial adviser to make your festive giving as impactful as possible.

Sources

How Inheritance Tax works: thresholds, rules, and allowances: Rules on giving gifts – GOV.UK

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

THE TAX TREATMENT IS DEPENDENT ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN FUTURE.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAX AND TRUST ADVICE