One of the most rewarding ways to use your wealth is to give money to your loved ones. It is also a common and legal way to reduce the taxable value of an estate for Inheritance Tax (IHT).
It is crucial to understand taxes on gifted money because, without proper knowledge, a well-intentioned gift can sometimes lead to unexpected tax bills. Although most cash gifts are tax-free at the point of transfer, the UK’s complex IHT rules mean that timing and amount are everything.
This blog explains the current rules of taxes on cash gifts to help you navigate gifting without falling into common tax traps.
Get in touch with our skilled professionals for expert UK tax and accounting solutions specialised to minimise your tax burden and resolve your financial challenges efficiently.
What are the Taxes on Gifted Money, and How to Pay Taxes on Gifted Money
In the UK, there are generally no immediate taxes on gifted money to pay when you receive or give money as a gift. The UK does not have a specific gift tax at the time the gift is given. However, Inheritance Tax may apply (under specified conditions).
Tax Rules on Gifting Money in the UK
If someone gives away money or assets and dies within seven years, the gift may be considered for Inheritance Tax. Whether or not the tax is owed depends on:
- The value of the gift
- When the money was given
- Who you give the gift to and your relationship with them.
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How to Pay Taxes on Gifted Money?
Any Inheritance Tax due on gifts is reported to HM Revenue & Customs (HMRC) as part of the estate after death. Remember, you do not need to report cash gifts to HMRC at the time they are given.
It is recommended to keep records of all gifts, including the date, recipient, amount, and relationship. This makes it easy to calculate IHT later.
You can find more information about taxes on gifted money on the official UK government website.
Who Pays Taxes on Gifted Money?
Under the 7-year rule, gifts usually become tax-free if the person who gave the gift survives for at least seven years. However, if you pass away within 7 years of giving the gift, and there is IHT to pay on it, the tax due after your death depends on when you gave it.
If a gift was given within 3 years before your death, it is taxed at the full 40% Inheretence Tax rate. The tax rate may be reduced over time, and this system is called taper relief. But, this taper relief applies only if the total value of all your gifts is more than the £325,000 Inheritance Tax threshold.
Understanding the 7-Year Rule and Taper Relief
Gifts that exceed the allowances are called Potentially Exempt Transfers (PET). These gifts become tax-free only if you survive for 7 years after giving the gift.
If the death occurs within this window (seven years), then it is added back to the estate value. Moreover, if the estate value is more than the £325,000 tax-free threshold, the gift may be taxed. See the table below for the applicable Inheritance Tax rates on gifts.
| Years between Gift and Death | Inheritance Tax Rate |
| 0 – 3 years | 40% |
| 3 – 4 years | 32% |
| 4 – 5 years | 24% |
| 5 – 6 years | 16% |
| 6 – 7 years | 8% |
| More than 7 years | 0% |
Do I Pay Taxes on Gifted Money
If you receive gifted money, you do not usually have to pay tax on it. As mentioned above, in the UK, unlike a salary, a gift is not considered taxable income.
However, if the money starts to earn interest in a savings account, that interest may be subject to Income Tax if it exceeds your personal allowance.
However, if the person who gave the gift money dies within the statutory period, the gift may be included in their estate for IHT purposes.
Advantages and Disadvantages of Taxes on Gifted Money
Since there is no immediate tax on gifted money, the advantages and disadvantages revolve around record-keeping and timing.
Advantages
- Recipient gets immediate support
- Surviving seven years after making the gift usually removes any Inheritance Tax liability
- Annual exemption offers immediate IHT protection
- Gifting money to low earners can reduce the interest tax
Disadvantages
- If you die within 7 years, the gifted money triggers tax
- Complex record-keeping requirements
- May cause confusion about taper relief rules
Why Do You Have to Pay Taxes on Gifted Money
There are many reasons why you need to pay taxes on gifted money. Here are some common ones:
- Prevent people from avoiding IHT by giving away their assets just before they die. Without these rules, individuals could transfer assets before death to avoid the standard 40% Inheritence Tax rate.
- It stops parents from shifting their own taxable income into their children’s tax-free allowance.
- The system treats living inheritances similarly to those left in a will, maintaining fairness.
Taxes on Gifted Money From Parents
Parents can give money to their child or grandchild as gifts without any specific limit. If you give a large sum to your children and die within 7 years, the same IHT rules apply.
Moreover, if you gift money to a child under 18 who earns more than £100 in interest annually, you must pay Income Tax on that interest.
Who Does Not Pay Inheritance Tax
There is no IHT to pay on gifts between civil partners or spouses. You can give unlimited gifts to your spouse or civil partner during your lifetime if they are permanently based in the UK.
Furthermore, there is no IHT to pay on gifts a person gives to political parties or charities.
How to Avoid Paying Taxes On Gifted Money
An individual can use some safe allowances to give tax-free cash gifts. This means your gift can never be subject to taxes, regardless of when you pass away:
Annual Exemption
Each tax year, you can gift a total of £3,000. You can carry it forward for one year only if you don’t use it, allowing for a £6,000 gift.
Small Gift Allowance
An individual can give a gift of up to £250 per year to as many people as they want. Remember, it cannot be combined with the £3,000 exemption for the same person.
Gifts for Civil Partnership or Wedding
There are no taxes on gifted money when it’s for a wedding or civil partnership. Depending on your relationship with the person, you can gift £5,000 to a child, £2,500 to a grandchild, and £1,000 to anyone else.
Gifts from Regular Payments
You can make regular financial gifts to another person. There is no limit to how much you can give tax-free as long as:
- You pay from your regular income
- You can afford the payment after meeting your living expenses
Charity and Spouse Exemption
Gifts to your spouse or registered charities are unlimited and 100% tax-free.
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The Bottom line
If you are planning to give money to your loved ones, you might hope to minimise the IHT that may be charged on your gift after you pass away.
Navigating taxes on gifted money can sometimes be overwhelming. However, by understanding the tax rules on gifted money, you can ensure your loved ones keep more of your inheritance. It can also help your family to avoid unexpected tax bills.
You can stay within the annual £3,000 exemption and use the small gift allowance to support your family without creating future Inheritance Tax liabilities. As UK tax rules can change through government budgets, starting your gifting strategy sooner is often the most tax-efficient move you can make.
Speak to an Expert
Get in touch with our skilled professionals for expert UK tax and accounting solutions specialised to minimise your tax burden and resolve your financial challenges efficiently.
How AccountingFirms Can Help to Manage Your Gift Tax Planning?
Need help managing taxes on gifted money? Visit our website, AccountingFirms. We have skilled accountants who provide the most efficient and accurate accounting services. They ensure your gifts are structured and accurately recorded so they don’t trigger massive IHT bills later.
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.
