HMRC permits individuals to make tax-free gifts up to £3,000 each tax year, known as the annual exemption. Additionally, there are other exempted gifts, including:
- Small gifts (up to £250 in value)
- Wedding or civil ceremony gifts
- Gifts to your spouse
- Gifts to charities and political parties
- Gifts to cover living costs
Do you incur taxes when receiving a gift?
Generally, exempted gifts mentioned earlier, like those above, are not subject to inheritance tax or income tax. However, if a gift surpasses a certain amount (e.g., over £3,000), it might be subject to income tax. In the unfortunate event of the gift-giver’s passing, the received gift could then be subject to inheritance tax.
What’s inheritance tax?
Inheritance tax is a levy on the estate of a deceased person, usually set at 40%. The estate’s value often determines whether inheritance tax applies:
- Estates below £325,000 don’t require inheritance tax payment.
- Estates exceeding £325,000 are subject to a 40% inheritance tax.
For more details on inheritance tax, consult the government guidelines. Reassured offers a free trust service on most arranged policies, potentially helping your loved ones save on inheritance tax.
What’s the maximum amount of money you can give as a tax-free gift?
The taxation of a cash gift hinges on several factors, such as:
- Your relationship with the recipient
- The occasion (birthday, wedding, living expenses, etc.)
- The gifted amount
As previously mentioned, you can freely gift up to £3,000 tax-free each tax year. This total amount means that if you intend to give cash gifts to multiple individuals, you must distribute the £3,000 among them to avoid tax liabilities. Unutilized annual exemptions can roll over to the next year, doubling to £6,000 for that tax year, but this rollover is a one-time allowance according to HMRC.
Additionally, you’re allowed to provide small, tax-free cash gifts of up to £250 (e.g., Christmas or birthday gifts). However, these small gifts cannot be given to the same individuals you’ve already gifted your annual exemption to, as this could result in tax implications.
How do I avoid gift tax?
Avoiding gift tax is feasible as long as the gift remains under £3,000 (annual exemption) or falls into other exempted categories, such as wedding gifts, small gifts (up to £250 from regular income), gifts to charities, gifts for living expenses, and gifts to your spouse. Writing a life insurance policy in trust is another strategy to minimize or avoid inheritance tax, providing control over the policy, bypassing the probate process, and ensuring beneficiaries receive the payout without a 40% tax.
Do I need to declare cash gifts to HMRC?
Small cash gifts under £250 and those utilizing the yearly £3,000 annual exemption do not require notification to HMRC. However, amounts exceeding these limits may be subject to tax and must be declared to avoid costly fines.
What is the best way to gift money?
You can give money while alive by directly transferring funds to the recipient’s bank account or writing a cheque. After passing away, you can provide an inheritance by naming beneficiaries in a life insurance policy. Writing the policy in trust helps minimize or eliminate the 40% inheritance tax, granting more control, speeding up the process, and ensuring your loved ones benefit fully from the policy. At Reassured, our team can guide you through securing life cover and assist in writing your policy in trust if offered by the insurer.
