The rules of gifting and passing on money

Gifting to help a loved one struggling with the cost-of-living crisis

As the cost-of-living crisis has hit the UK, many people are feeling the pinch. Young people in particular are cutting back where possible – a quarter of 18-34-year-olds have reduced their rainy-day savings as price rises bite, according to TSB research.

Further research from TSB revealed that more than one third of parents are financially supporting their adult children. More than half of these said their children wouldn’t be able to cover essential bills without their help.

In April, the financial stresses of soaring energy costs will be pushed back onto households as the government’s energy bill support scheme ends. This means that parents may increasingly be looking at ways to offer financial support to their adult children in difficult times.

For some parents, this support could take the form of gifting. There are several allowances available in the UK that let you give gifts without incurring a tax bill. Gifts can be money, jewellery, property, land or stocks and shares.

What are the rules for gifting money?

An individual can give £3,000 a year tax free (£6,000 per couple) with a gift allowance called the annual exemption. You can split this between several people or give it all to the same person. You can carry forward any unused exemption to the next tax year, but only for one year.

The small gift allowance lets you give as many gifts as you want of up to £250 per person, as long as you haven’t used another allowance on the same person. You can also give a tax-free wedding or civil partnership gift – you’re allowed to give up to £5,000 to your child; £2,500 to a grandchild or great-grandchild; and £1,000 to anyone else.

You can make regular payments to help your child or someone else with their living costs tax free, and there’s no limit as long as you can show that the payments come from your surplus income and don’t affect your usual standard of living. This is called normal expenditure out of income.

If you give a gift that isn’t covered by any of the exemptions available, it will be considered a potentially exempt transfer (PET). This means it will be subject to Inheritance Tax (IHT) if you die within seven years of giving the gift and your estate exceeds the nil-rate band.

The nil-rate band is £325,000 per individual and includes all types of assets you may own. There is also a £175,000 residential nil-rate band you can use if you’re passing on your home to your direct descendants.

If you die within three years of giving a Potentially Exempt Transfer gift, it will be subject to the full 40% IHT rate. If you die within three to seven years, you’ll be taxed according to a sliding scale called taper relief.

Keeping records of what you’ve given and when will help your executors when they come to sort out your finances.

The IHT net widens

Inheritance Tax used to be thought of as something that affected only the wealthiest families, but as property values have increased over time and the IHT threshold has been frozen, an increasing number of estates will now be caught by IHT. The latest official figures show that IHT receipts in April to December 2022 netted the Treasury £700 million more than in the same period the previous year.

Making the most of these tax reliefs can not only help you support your family now, but it can also reduce the value of your estate for IHT purposes, meaning your loved ones will keep more of your assets after you’re gone. However, it’s important that giving money today doesn’t jeopardise your own financial security long term, says Peter Field, Marketing Proposition Manager at St. James's Place.

“You need to have a plan, know exactly what you can afford to give and what your allowances are,” he says. “In the past, wealth has been passed down from generation to generation when someone dies, but now people are living longer, is that the right way to do it?” Peter suggests there may be more tax-efficient ways to pass on wealth, such as maximising your pension contributions and then giving that pension to a beneficiary, as pensions don’t form part of your estate.

An intergenerational conversation

Gifting, legacy planning and tax awareness should all be part of a conversation between generations of a family, says Peter. A professional financial adviser who knows you well can help guide it.

“Passing wealth onto our loved ones is one of the final acts of kindness we’re able to make, so it’s concerning that the amount many believe they will be able to pass on is eroding,” he says.

“But that needn’t be the case. Putting the right plans in place at an early stage will allow greater opportunity to build wealth over time and leave behind as much as possible when you’re gone, without making unnecessary sacrifices along the way.”

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.

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