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We live in a time of serious financial concern for many of us. People with more cash to spare might want to help their loved ones – but what are the rules of gifting money?
From how much you can give away each year, to understanding Inheritance Tax rules, this guide will help you understand what you can – and can’t – do when it comes to giving money away.
Gifting money doesn’t mean the recipient has to pay income tax. They may, however, have to pay tax on the interest the money earns.
Financial gifts aren’t considered taxable as income, so won’t boost a basic-rate tax payer into a higher rate. However, if they already have savings earning over £1,000 in interest each year, the interest earned on the gifted sum will be liable for tax.
The only time your children will have to pay any tax on ANY amount of money you give them is a potential Inheritance Tax bill – and that’s only if you pass away within 7 years of giving the cash.
Every year, you’re allowed to gift family members up to £3,000. This won’t come under any Inheritance Tax rules, and you can gift that amount every year. For children under 18, you can pay up to £4,386 per year into a Junior ISA for them, plus the gift up to £3,000 in another type of savings or bank account. They can’t touch the money in a Junior ISA until they turn 18, but may be able to access money in other junior accounts from a younger age.
If you didn’t provide a gift in the previous tax year, you can roll one year’s allowance over, taking the total tax-free gift for each child to £6,000. Married couples and civil partners each have a £3,000 gift allowance. However, you each need to pay the gifts separately to make sure you don’t accidentally give £6,000 from one person in the year. If that happens, your second £3,000 could fall under Inheritance Tax rules.
You’re also allowed to gift your children up to £5,000 (grandchildren £2,500) for one-off ‘life events’. This could be helping with wedding costs, for example, or contributing towards a house deposit.
You can give much more than that – but certain rules apply (see below).
Inheritance Tax is the money your loved ones may need to pay to the Government if you leave them assets in your will when you die.
If you have less than £325,000 in assets (including property, savings, bonds etc) making up your entire estate, no IHT is paid. Married couples double the allowance, taking the total to £625,000. So, when one spouse dies, their allowance transfers to the surviving spouse.
Anything over that amount can mean the people who you leave money to will have to pay tax on it. So, if your estate is worth less than £325,000, you can give any amount of money as a gift without worrying that the recipient may eventually have to pay Inheritance Tax on it.
We go into this in much more detail in this article here – but here’s the short version.
As of April 2017, there is something call the Residential Nil Rate Band. That means anyone leaving property to their direct descendants has an extra £175,000 in their Inheritance Tax allowance before any tax is paid.
Also, if your child lived with you in the property and paid you rent, or bills, the property could be fully exempt from inclusion in IHT calculations. This is a tricky bit of legislation, so if this is your situation it’s best to speak to a financial advisor.
There is one way to get around the annual £3,000 gift limit for family members. If you regularly provide gifts larger than £3,000 on an annual basis to the same person or people, and it comes out of your normal living expenses without leaving you in debt or detriment, it’s counted as ‘normal expenditure out of income’. You must ensure you’re not depriving yourself of capital to do this. However, if you want to support your children in the long-term with gifted money, this is one way to do so without coming into Inheritance Tax rules. If this sounds like something you could do, make sure you seek independent financial advice before acting on it.
If you want to gift your relatives a lot more than the £3,000 limit, that’s entirely possible. However, there are some caveats.
Firstly, you’ll both benefit from a written agreement that it is a gift, and that you have no financial benefit or interest in the result of providing the gift. For example, if you want to give your child £6,000 seed money to help them start a business, you have to guarantee you won’t try to recoup the money (or benefits gained from the money) at a later date.
Secondly, the 7-year Inheritance Tax rule is worth thinking about.
When you give larger sums of money, if you die within seven years of that gift, the money is subject to IHT. That means the person who you gave it to needs to stump up the tax. This is, of course, only if the large cash gift would be part of an estate worth over £325,000 at the time of your death (if you had not given them the money).
There’s a tapered allowance on the 7-year rule. If you die less than 3 years after providing the gift, tax due will be 40% of the gift. Then:
This huge 40% IHT due if you die in the first three years seems shocking, for sure. However, if you’re ummming and aahhing about providing the large gift, look at it like this:
If you die within the next 3 years and will leave that cash to your loved one anyway, they still have to pay 40% IHT. However, if you live longer than those 3 years, they’re paying LESS in IHT than if you waited to leave it to them on your death (up to potentially no IHT at all).
You’re allowed to gift £3,000 to other relatives, too. Parents, grandparents, aunts, uncles, nieces, nephews, and cousins can all receive this amount.
If you want to gift to extended family or close friends, the most you can give each year is £250.
There’s a limit to how many gifts of £3,000 or £250 you can give to individuals. For example, if you have four children (4 x £3,000) and five close friends (5 x £250), you could not gift a total of £13,250 each year without being subject to taxes.
You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’.
You can give gifts or money up to £3,000 to one person, or split the £3,000 between more than one person.
Giving money to family and friends often turns into a sticky matter. Emotions can run high if anyone feels they’re being treated unfairly, so if you’re not sure about providing a gift there are other options to consider.
If a family member really needs the money right now, consider a loan. Have a formal agreement drawn up that outlines the money is a loan – and not a gift.
This also helps in many situations regarding IHT or when either of your finances come under scrutiny. For example, if you want to help by providing a large deposit for your child’s first home, clarifying the loan in a formal agreement will help with mortgage applications. (In this case, make sure you stipulate that there is no minimum monthly repayment or maximum term on the loan – so mortgage lenders won’t take repayments into account).
Many parents want to help their older children when they struggle in situations like divorce or separation. However, providing a financial gift in these situations can sometimes muddy the waters for their own finances.
Look at how you can provide shelter in other ways. Perhaps your child can return to live with you for a short time while they get back on their feet. Alternatively, if you have a lump sum you want to invest, consider buying a property they can live in. They can pay rent towards the mortgage repayments – and you have a solid investment that you can always rent out or sell when your child is in a stable position again!
If neither of these options is suitable, see if you can provide assistance with some other costs such as paying for the weekly shop, which will ease up their finances for rent or mortgage payments.
Sometimes, childcare costs rocket in a way that’s hard to handle. Balancing going to work with nursery costs is a tricky line – many parents find they may be better off NOT working because they earn only the nursery costs!
Offer to look after your grandchildren on a regular basis if you can. This’ll reduce the financial stress on your children AND help you develop a great relationship with your grandchildren.
It’s a tough conversation, but if you know a loved one is struggling financially, have a conversation with them about their debt. It’s easy to feel overwhelmed as debt spirals, and they may not want to ask for help.
Find out where the debt came from. If it’s from a low-income/high expenses situation, help them create a budget or find extra work to top up their income. Alternatively, it could be from an addiction – in which case, offer your support and help them find the professional help they need.
Or, debt may – these days – come from the coronavirus situation. It’s nobody’s fault: furlough, redundancies, and childcare pressures have caused many of us to turn to our savings (if we have any at all!). If this is the case, help your loved one by finding extra income streams they could try. Or, you could help them switch energy, broadband, and internet suppliers to save money – small things like this quickly add up!
You’re probably now wondering about other ways you can invest for your grandchildren, or whether your will is up-to-date. Check out these articles for more help with finances and family!
*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.