How Much Can You Gift Each Year Tax-Free?

Understanding the tax implications of gifting money to family members or friends is crucial to avoid any unexpected tax bills. In the United Kingdom, the HM Revenue and Customs (HMRC) has set certain limits and rules that need to be followed when making gifts. This article explores these rules in detail.

What is a Gift?

According to the HMRC, a gift can be anything that has a value, such as money, property, or possessions. It can also be a loss in value when something’s transferred. For instance, if a parent sells their house to a child for less than its worth, the difference in value is a gift.

Tax-Free Gift Allowances

The HMRC allows you to give away a certain amount of money each year without having to pay Inheritance Tax. This is known as your ‘annual exemption’. Let’s explore these allowances:

• Annual Exemption: You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’. If you have not used your annual exemption in the previous year, you can carry it forward to the next year, but you cannot carry it forward beyond that.
• Small Gifts: You can make small gifts up to the value of £250 to as many individuals as you like in any one tax year.
• Wedding Gifts: Each tax year, you can give away wedding or civil ceremony gifts of up to £1,000 per person (£5,000 for a child and £2,500 for a grandchild or great-grandchild).
• Regular Gifts or payments: You can also make regular gifts from your income, such as monthly payments to your child, as long as you have enough income left after making them to maintain your normal lifestyle.
• Donations to Charity and Political Parties: Gifts to charities, museums, universities, community amateur sports clubs, and political parties are exempt from Inheritance Tax.

Seven Year Rule

If you gift an amount that exceeds the annual exemption, the ‘seven-year rule’ comes into play. If there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the 3 years before you die. Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’. More details can be found on the HMRC’s website.

Conclusion

Understanding the tax-free gift allowances can help you make the most of your money, ensuring that as much of it as possible goes to your loved ones. However, the rules are complex, and it’s advisable to seek professional advice if you’re planning to make significant gifts.

To find out more about gifting and its tax implications, you can visit the HMRC’s official webpage.

Disclaimer: This article is for informational purposes only and should not be taken as legal or financial advice. Always consult with a qualified professional before making any financial decisions.