You may have received cash as a gift on your wedding, birthday, or any other special occasion. Some people give money as a generous gesture, while others may do so to minimise the Inheritance Tax (IHT). It may be charged on their estate after they have passed away. But have you ever wondered if there are any rules on how much you are allowed to receive cash as a gift?
This blog post explains the taxes on gifted money in the UK and what tax might apply to it. After reading this blog, you will understand the rules and allowances on cash gifts.
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Do You Have to Pay Tax If You Get Gifted Money?
While discussing taxes on gifted money, you must know that in most cases, you do not pay Income Tax on money you receive as a gift. Gifts are not considered income, and you don’t need to be declared on your tax return. Nonetheless, the rules are different when it comes to who gave it to you and what happens to that money later. This is because certain gifts may fall under Inheritance Tax (IHT) rules.What are the Rules on Giving Gifts in the UK?
Many people assume that gifted money is tax-free in the UK. In many cases, yes, you do not pay taxes on gifted money, but the tax treatment of gifts is different when there is a larger amount involved.What is the 7-Year Rule for Gifted Money?
When searching for taxes on gifted money, people often get confused about the 7-year rule. Therefore, you must know that IHT may have to be paid after your death on some gifts you have given. Most lifetime gifts are classed as Potentially Exempt Transfers (PETs). If you survive for 7 years after making the gift, no IHT is due on that gift. For example, a parent gifts their daughter £20,000, and they live another 10 years. This result is no IHT. However, if you die within 7 years, the gift may trigger IHT. The tax depends on the value of the gift, when it was given, who you give it to, and their relationship to you. For example, a parent gifts their son £100,000 and dies after 4 years. As a result, the gift may be considered for IHT calculations.What Counts As A Gift?
Before explaining taxes on gifted money, let’s understand which items count as a gift. Gifts include personal goods, household items, money, a house or land, stocks and shares, and unlisted shares you held for less than 2 years before your death. If you sell something to someone for less than its worth, the difference is also counted as a gift. For instance, if you sell your diamond ring worth £200,000 to your child for £100,000, the £100,000 difference is treated as a gift. Additionally, if you give some shares within 2 years before death, they are also counted as gifts.What Does Not Count As A Gift?
Anything you leave in your will does not count as a gift in the UK. However, it is part of your estate. Your estate is everything you own when you die, including property, money, and other belongings. To see if IHT must be paid, the value of your estate will be used.How Does Inheritance Tax Impact Gifted Money?
While understanding taxes on gifted money, it is important to learn if IHT affects gifted money. Inheritance Tax (IHT) is a tax levied on the estate, such as money, property, and possessions, of someone who has passed away. Normally, there is no IHT to pay if either:- The estate value is below the £325,000 threshold
- You leave everything above the £325,000 threshold to your spouse, civil partner, or qualifying charity.
What is the Standard rate of IHT?
The standard Inheritance Tax rate is 40%. It is only charged on the part of the estate that’s above the tax-free thresholds. For instance, if your estate is worth £600,000 and your tax-free threshold is £325,000. In simple terms, assuming no additional allowances apply, the taxable amount would be £275,000. The estate can pay a reduced rate of IHT (36%) on some assets if you leave 10% or more of the net value to charity in your will.When Can Tax Apply to Gifted Money?
In the UK, the person who receives the money as a gift does not pay tax. Rather, taxes apply only if the gift giver dies within 7 years. The ultimate tax due, if any, is governed by IHT rules and your specific relationship to the giver.Do You Pay Tax on Receiving a Gift of Money?
No, usually, you do not pay taxes on gifted money. However, the money you receive as a gift can affect IHT if the gift giver dies within 7 years of making the gift. As mentioned, you don’t pay Income Tax on a cash gift and generally do not need to report the gift to HMRC simply because you received it. The main tax consideration is IHT, which relates to the gift giver and their estate.Is Income From Gifted Money Taxable?
Usually, the gift itself is tax-free, but any income generated from that gift, such as bank interest, dividends, or rental income, may be taxable depending on your circumstances.What Happens If The Gift Giver Dies Within 7 Years?
If a gift giver dies within 7 years of making a gift, the gift is classified as a PET and is temporarily brought back into the estate calculation to determine if IHT is due. Look at the table below, which outlines the taper relief used by the UK government to calculate taxes on gifted money if the gift giver dies within 7 years.| Years Between Gift and Death | Taper Relief |
| Less than 3 years | 0% |
| 3–4 years | 20% |
| 4–5 years | 40% |
| 5–6 years | 60% |
| 6–7 years | 80% |
| 7+ years | No IHT |
How Much Can You Give Tax-Free Gifts?
In the UK, each tax year, you can give gifts like possessions or money free of IHT. This means you don’t pay taxes on gifted money or possessions. How much is tax-free depends on the allowances you choose to use. There are special tax-free allowances you can use, such as:Annual Allowance
By using this allowance, you can give away up to £3,000 worth of gifts each tax year without counting them towards your estate for IHT purposes. You can give the money or gifts (worth £3,000 ) to one person or split the £3,000 between many people. Moreover, if you do not use your annual exemption in one tax year, you can use it for the next year. However, you are allowed to do this for only one tax year. Visit the official HMRC website to learn more about taxes on gifted money and how to reduce Inheritance Tax.Small Gift Allowance
You can give gifts up to £250 per person each tax year to as many people as you want. However, if you have used another allowance, like an annual allowance on one person, you cannot use this allowance on the same person.Regular Gifts From Income
You can give regular gifts or make regular payments from surplus income to another person. For instance, making a payment to pay a child’s school fees.Gifts for a Wedding or Civil Partnership
If someone is getting married or if you have a civil partner, you can give tax-free gifts up to:- £5,000 to a child
- £2,500 to a grandchild or great-grandchild
- £1,000 to any other person
Can I Gift 100k to My Son In the UK?
Yes, you can legally gift your son £100,000, and they would not pay taxes on gifted money. However, the timing of the gift and tax residency does matter, and you should be aware of the following tax implications. There is no legal limit on how much money you can gift to your son in the UK. If you live for 7 years after making the gift, it is usually outside your estate for Inheritance Tax. However, if you die within 7 years, the gift will be included when calculating IHT on your estate.How Much Can You Gift to Family Without Being Taxed?
You can give £3,000 each tax year under your annual exemption. Larger gifts can also be made and may become fully exempt from Inheritance Tax if you survive for at least 7 years. This is called your Annual Exemption. It can be given to one person or split among several family members. Using this annual gift allowance prevents you from paying taxes on gifted money. There are other tax-free gift allowances as well that you can use to gift your family, such as:- Small gift allowance
- Wedding or civil partnership gifts
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