When do I need to pay tax on financial gifts to family members?

By Shaun Robson & William Stevens

December 2022

The rules surrounding financial gifts to family members in the UK may seem simple, but they are full of complications, which can catch many off-guard. However, the good news is that there are plenty of tax exemptions available for use. In this blog post, we run through some of the different rules that apply to gifts given to adults and those given to children.

Whether you are seeking to pass on a tax-free gift to your family or the means to mitigate Inheritance Tax (IHT) on your estate, understanding the latest legislation and tax consequences or exemptions can help you make gifts tax-efficiently*. Importantly, there are limits to how much you can gift at any one time, as well as timelines for when a gift might still incur a tax liability. Read on to learn about some helpful ways to make tax-efficient cash gifts.

Please note: many of the ideas in this blog post involve an element of investing. As is the nature with all investing, your capital is at risk, and you may not receive back the same amount you put in when you choose to cash out your savings. In addition, the ideas set out in this blog post are based on our current understanding of UK legislation, impacting only those within the UK tax system.

Why should I make a financial gift to a family member?

Making a financial gift to a family member is a great way to help them financially and could also help reduce any future Inheritance tax liability your estate may have. While this is especially important for estate planning, your family members may also benefit from tax-free savings by using the appropriate savings vehicle.

Financial gifts not only offer recipients the opportunity to benefit from long term returns but are also a more sustainable way to celebrate milestones than material goods.

Whether you are gifting cash to help a family member purchase a home, fund education, or to help a child start saving for their future, taking advantage of various options for tax relief can help them retain as much of the gift as possible.

What tax will I pay on my financial gifts?

There are two very important rules to be careful of when making financial gifts to avoid any unexpected consequences.

  1. Gifts in excess of £325,000 (the nil rate allowance for Inheritance Tax purposes) are subject to an immediate tax charge as they are known as Chargeable Lifetime Transfers.

  2. Gifts below this amount may still be liable to tax, unless they meet one of the following: (i) the rules set out below on regular gifting out of excess income, or (ii) you make the gifts and subsequently live for a further 7 years – the so-called, seven year-rule, which we will cover in a future blog post.

What should I consider when gifting to children?

Children qualify for special forms of tax relief designed to help them build savings for the future, that can go a long way to helping them to save more of the money they have been gifted. For the purposes of this blog post we are defining a child as someone aged 16 or under, rather than a dependent or direct relation to the giver.

Tax-efficient gifts can be transferred directly into a child’s Junior Individual Savings Account (JISA) or Child Trust Fund (CTF), which allows the child to take home the entire cash gift and allows them to build up their tax-efficient savings. For example, if you invested £9,000 on the day a child was born, this could be worth over £1,000,000 on the day they turn 70 (based on an average compounding rate of 7%)**.

One way to easily gift into a JISA or CTF is by using Silo Gift, a feature within our Silo app that allows grandparents, godparents, aunts, uncles, family and friends to directly contribute into a child’s Junior ISA or CTF. Silo Gift enables you to generate a unique link to send a cash gift from your nominated Silo account, which you can then send to the recipient via email, SMS, or WhatsApp.

Find out more about Silo and download the app here

When gifting to a minor as a parent, it is important to remember that should you not gift into a tax-efficient structure such as an ISA, you may be liable for any tax more than £100 that arises on the investment/cash because of gains, interest, or dividends. This mechanism is designed to stop parents simply allocating money to their children to mitigate future taxation.

Enquire now:

What should I consider when gifting to adults?

While adults can benefit from tax-free savings of up to £20,000 in an Individual Savings Account (ISA), it is useful to note that different rules may apply to those than for gifts to children. However, there are plenty of exemptions to assist you in mitigating any potential taxation.

You can make cash gifts to family members without these being added to the value of your estate. Every adult in the UK can gift up to £3,000 each year before the gift becomes liable for IHT, while you can make as many gifts of up to £250 per person each tax year (provided you have not used another allowance on the same person). In addition, there are also specific allowances for wedding gifts.

Another option is to make cash gifts under the ‘gifting out of excess income’ rule, which is particularly beneficial for those with higher incomes seeking to mitigate IHT, as there is no limit to the amount you can give. These gifts must meet the following conditions to qualify for this rule:

  1. Gifts are made from excess income surplus to your expenditure needs and do not affect your standard of living.

  2. Gifts form part of your normal expenditure (e.g., standard, regular, typical, habitual, or usual) and are made regularly (i.e. annually).

  3. Gifts should leave you with enough income to enjoy your normal standard of living and should not have a detrimental effect on this.

Please note: gifting out of excess income is more complicated than it seems, and mistakes could cause the recipient of the gift to become responsible for paying the IHT liability. We recommend keeping a record of your gifts, alongside your income and expenditure to ensure the position is clear should it ever be queried.

More ways to make tax-efficient gifts to family members

While some form of tax is likely to apply to cash gifts made to family members in the UK, we have highlighted a few options for mitigating these effects within this blog post. Gifting into a JISA or CTF can help a child grow their savings for the future, with Silo Gift being one way you can easily send cash gifts. When gifting to adults, making use of your gifting allowance and excess income can help them move closer to achieving their financial goals and may prevent you from incurring further IHT on your estate.

Regardless of why you make a cash gift to a family member, doing so at the right time can help them to receive the maximum benefit and help you to make the most of your finances, while you may also find that Wealth Planning services can help identify other opportunities for savings.

For personalised advice around how to make tax-efficient gifts, speak to a Wealth Planner.

* Please note, the tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

** As is the nature with all investing, your capital is at risk and you may not receive back the same amount you put in when you choose to cash out your savings.