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How much can you gift tax free?

Providing your children, family or friends with a gift can be an amazing way to support them financially throughout their lives. Gifting money or personal items in the UK is incredibly easy to do, but there are potential tax implications to be aware of.

It’s important to know how much you can gift to your children and how you can gift money to help reduce your tax liability. Millions of parents every year Gift money to their children to reduce their inheritance tax liability and support them financially.

In this article, our team of experts answers the question ‘how much can you gift tax free in the UK’. We’ll also explain the rules around how gifting money works and the best ways to use your Annual Allowance to reduce your tax liability.

According to official figures, the UK government will collect around £7.2 billion in inheritance tax (IHT) payments in 23/24. The charges equate to approximately 0.7% of all taxes collected in the UK this year and it is equivalent to 0.3% of the national income.

You can also use a type of life insurance called ‘Whole of Life Insurance’ to protect your family against inheritance tax (IHT) liability. Many parents take out a policy that covers the amount that they are likely to pay in the event of their death to protect their children.

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60-Second Summary – How much can you gift tax free?

Not all of us will have to worry about inheritance tax and this isn’t something that many of us will need to consider or plan for. However, for those who are likely to have an inheritance tax liability, it can be a shock for your family after they have lost a loved one.

The current inheritance tax rate is 40% and the allowance for adults in the UK in the 23/24 tax year is £325,000 (or £650,000 for couples).

  • Inheritance tax bills can be £100,000’s if your estate is above the inheritance tax threshold and you are charged the full rate of 40% on any amount above your allowance.
  • Life insurance can be written in to Trust for free and inheritance tax can be avoided as this does not form part of your estate.
  • Whole of life insurance can be used to cover any potential inheritance tax liability for your family to protect them against significant tax bills on death.
  • Annual allowance for gifts to your children, family or friends is £3,000 per year and this can be money, possessions, property or land, stocks and shares.

Under the current HMRC rules, you are allowed to gift up to £3,000 per year to your family or friends. This is known as your ‘Gift Allowance’ or ‘Annual Exemption’, and the amount is effectively tax-free.

You can also carry your allowance over for one year and effectively combine two years allowance together. You cannot carry your allowance over for a third or any subsequent years beyond two years.

Below is a table that shows the different tax free gift levels and amounts that you might need to consider. These are according to the free money advice service Which? and are purely to be used as a guide, you should always seek proper advice from a tax expert or professional.

Amount or level for tax free gift allowanceExplanation and tax free gift rule
£0 (spouse or civil partner)Amount of tax to be paid on any gifts or money paid to your spouse or civil partner in your lifetime.
£3,000 (annual exemption)Tax free ‘Gift Allowance’ or ‘Annual Exemption’ that can be paid out each year.
£250 (individual gift)Annual tax free gift allowance for individuals  that have not received a tax free gift from your ‘Annual Exemption’ allowance
£0 (infirm relatives)Tax that would be due on gifts that are paid out to care for elderly or infirm relatives
£5,000 (wedding gift)Parents tax free gift allowance paid towards their children’s wedding
£0 (charities or political)Amount of tax that would be due to be paid on gifts to charity or a political contribution
7 years (IHT liability period)Gifts above your annual exemption allowance can count towards your IHT liability 7 years prior to your death
18 years (education gift age)Tax free education gifts for your children’s education and maintenance for education up to age 18 years.

Inheritance tax can be charged on any gifts that you have given up to 7 years prior to the date of your death. Any gifts that were given before the 7 years should not be liable for inheritance tax.

Any gifts that you gave within 7 years from the date of your death, could be charged inheritance tax based on:

  • Your relationship with the recipient of your gift
  • How much your gift was worth or the cash value
  • What date you gave them the gift (within the 7 years)

You should seek professional advice from a qualified tax adviser or speak to your accountant to answer any questions about your tax liability.

Financial journalist Martin Lewis recently explained more about the main rules for inheritance tax and gifts in the below video from MoneySavingExpert.com.

Martin Lewis: Inheritance tax will you pay it? A quick myth-buster to explain how it really works

The HMRC has very strict rules and guidance on what is classed as a tax-free gift to avoid any doubt or loop holes.

Current HMRC guidelines for tax free gifts are:

The biggest asset that we tend to own in our lifetime and when we die is our home or other properties that we own (e.g. rental properties). This is likely to be the main part of our estate which would cause an inheritance tax liability or charge.

If your home or any other properties that you pass on to your children, family or friends when you die, is worth more than the threshold (e.g. £325,000 for individuals and £650,000 for couples) then it is likely to incur inheritance tax charges.

Your property can be gifted to your family and you can potentially avoid your family paying inheritance tax, by gifting it to them over 7 years before you die. We all know that we can’t predict when we’re going to pass away, but we can prepare by planning these financial events.

Rules on gifting property to your family

There are several fairly simple rules that apply if you intend to gift a property to your family before you die.

  1. You must not sell the property to them for lower than market value to try to avoid paying tax.
  2. If you’re still living in the property then you must pay rent at the current market rate for the property.
  3. If you die within 7 years of gifting a property then you may have inheritance tax to pay on anything over the threshold for the value of the property.
  4. You can take out life insurance for the amount owing on a mortgage to clear any outstanding debts remaining and avoid tax.

Note: If you sell your house to your child, the sale may be subject to other taxes. For example, you may need to pay Capital Gains Tax (CGT) if the value of your home has increased.

Money that you can lose from selling it or passing it on

A common example of this is where some people try to get avoid paying inheritance tax by selling a property to their children for less than its market value. The difference between the sale price and the value of the property can be classed as a gift and may be liable for tax.

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There are different tax free gift rules for individuals that you have a different relationship with, for example spouse, children, family, or friends.

Can I give a tax free gift to my spouse or civil partner?

Gifts between married couples and civil partners are exempt from inheritance tax, so these do not count towards your Annual Exemption figure.

Note: Unmarried couples living together are not tax free and so you will need to consider any gifts between your partner if you’re not married.

Any gifts to your children, family, or other people (e.g. friends, colleagues, etc.) are not tax free and will form part of your tax free annual exemption allowance, so you’ll need to think about these carefully.

By properly planning any gifts that you want to leave while you’re alive, it could help to reduce your inheritance tax liability and any other tax implications. You should consider whether you’re going to want to give away gifts or money to your family or friends while you’re still alive.

Leaving possessions, property and money in your Will to your family, can have tax implications as they will form part of your estate.

If you leave anything to your family in your Will that has a value, that would also form part of your estate. Your estate will be used as part of the calculation for your inheritance tax liability and therefore tax may be charged.

Your estate will include any property, money, and possessions that you hold when you die. To help to avoid this situation, you can plan to leave numerous Tax Free Gifts to your family before you die.

A tax free gift can be the things that you would plan to leave your family or friends in your Will, but passing them on early can avoid any inheritance tax charges.

As far as the law is concerned, you can give any amount you want to your children before or after you die. There are several things that you should think about before you do anything like this, because of the potential tax implications if you die.

Giving more than your Annual Allowance (£3,000) in any financial year can be taxed and can cause inheritance tax issues. If you die within 7 years of gifting an amount like £50,000 then your children or family could pay up to 40% tax on that money.

Inheritance tax charges would also only apply if the overall estate of the person who passed away is higher than the threshold (currently £325,000 or £650,000 for couples).

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You don’t actually need to declare gifts that you receive from a parent, family member or friend on a self-assessment or tax return. If the person who donated the gift (donor) dies within 7 years of passing that gift to you, then you could have inheritance tax charges to pay.

The HMRC will usually carry out an audit of the person who passed away to assess the value of their estate to calculate any tax owing. Your estate will be calculated based on the total of your worth, including any cash, possessions and property that you own when you die, including your Will.

It is essential to seek proper advice for any gifts that you receive and especially large sums of money or property.

You might be familiar with a ‘7 year rule’ for tax free gifts and inheritance tax, which relates to the amount of tax charged if you die within seven years of giving someone a gift. There’s a HMRC tax rule that applies for 7 years after a family member or friend gives you a gift of money, property, or possessions, also known as ‘taper relief’.

Below is a table that shows the latest HMRC tax charges for gifts over the threshold of £325,000 for individuals and £650,000 for couples.

Taper relief period for if you die within 7 years of a gift being givenAmount of inheritance tax (IHT) payable for any amount over the tax free gift and threshold
Within 3 years40% inheritance tax
3 to 4 years32% inheritance tax
4 to 5 years24% inheritance tax
5 to 6 years16% inheritance tax
6 to 7 years8% inheritance tax
More than 7 yearsNo inheritance tax charge

You can usually mitigate your families risks of being charged inheritance tax by being clever about how and when you give them gifts, as shown above.

Life insurance has two potential applications when it comes to tax charges on death, which are to help avoid paying tax (e.g. life insurance trusts) and protect or insure against the amount of tax owed (e.g. whole of life insurance).

Taking out life insurance can be a great way to reduce or even avoid any inheritance tax charges, and maximise your families inheritance. Many people in the UK take out life insurance policies specifically for inheritance tax purposes.

You should speak to a life insurance expert to find out how much you could save and how much it might cost for a policy based on your own needs and circumstances.

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Is it worth paying for life insurance?

Yes, if you’ve got children or financial dependents then you should have life insurance to protect them if you die. Martin Lewis and the Financial Conduct Authority recommend that you take out life insurance to protect your family and your home. Generally, life insurance premiums start from as little as £5 per month and will be cheaper for younger adults.

Common myths about life insurance:

  • Life insurance won’t pay out (pays out 98% of claims)
  • People with medical conditions can’t have life insurance
  • Life insurance is expensive
  • Savings can be just as effective as life insurance
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What is the average cost of life insurance per month?

Based on recent research carried out, the average cost of life insurance is approximately £38 per month and the average level of cover is £152,000. Life insurance premiums also vary dramatically from one insurance provider to another and you can reduce your monthly premiums by shopping around.

Fundamentally, life insurance premiums vary depending on your age, health and the amount of cover that you need, starting from as little as £5 per month. You can also get life insurance to protect your family and your home against financial loss if you die.

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What does life insurance cover you for?

Life insurance is a monthly renewable ‘term insurance’ contract that pays out a cash lump sum or regular payments on death to your family or beneficiaries. Policies are most commonly used for family protection or mortgage protection for your loved ones if you die and your household income reduces, plus the additional issues of losing a parent or carer.

Traditional life insurance will not exclude any pre-existing medical conditions and will cover suicide after 12 or 24 months. You can also use life insurance for business protection purposes as well as tax-efficient business life insurance for directors or key people.

What are the disadvantages of life insurance?

The biggest and most common problem that consumers have with life insurance is the cost and the monthly premiums. This is the top reason for policy cancellations and why more people don’t take out life insurance to protect their family.

Another key disadvantage with life insurance is that it holds no investment value, nor can you cash it in. Life insurance works like any other traditional general insurance policy (e.g. car insurance, house insurance, pet insurance etc.), you pay a monthly premium and it will pay out in the event of a claim. Some people decide to use savings instead of taking out life insurance but you need to make sure that you have sufficient savings to cover the costs of death for your family.

Why do I need life insurance?

The fact is that nobody actually ‘needs’ life insurance, but it is strongly recommended that families and couples have cover to protect their loved ones in the event of death. Martin Lewis recommends life insurance and says “this is something that every parent, partner, or person with any other type of dependent needs to consider”.

Life insurance financially protects your loved ones if you die and pays out a cash lump sum to repay your mortgage, pay for school fees, replace lost income, and pay for regular outgoings. Mortgage life insurance is not linked to your mortgage debt so you can use it to pay off some or all of your mortgage.

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