Inheritance and Gifting: How to Gift Money to Your Children Legally

In answering the question, “Can I gift money to my children?” it’s important to consider the tax implications concerning the inheritance process. In this Moneyfarm blog, we explain these implications and list the key points you should consider if you’re thinking of gifting money to your kids. In addition, we explain the importance of choosing the most competitive savings account, one of the best of which is a JISA (Junior ISA)

The cost of raising a child in the UK

The cost of raising a child in the UK today is significantly high. It’s why some parents use their £3,000 per annum annual exemption to gift their adult children extra money to help them cope with raising their kids.

The rules regarding gifting money to your children

Many parents and grandparents choose to leave money to their children after their death. It is a convenient way of investing for children.

But there is a growing trend to gift money before parents or grandparents die. Many give the gift of premium bonds to children. Some decide to open a child’s savings account.

Whether you decide to gift money to children through your last will and testament as part of your estate or earlier, you need to know how to navigate the tax rules. So first, let’s look at inheritance tax, sometimes referred to as hereditary tax in the UK.

Legal procedure for donating money to children

Donating and gifting money to children are essentially the same thing. It can be done either as part of your estate after your death or during your lifetime, in which case certain rules apply regarding tax limits. We shall now look at these limits in detail.

Can I gift money to my children via my last will and testament?

Yes, you can, and there is one important, fundamental rule whereby inheritance tax gifts to children will be exempt from inheritance tax (IHT for short)– if the total value of your estate is less than £325,000. This is the inheritance tax allowance if no property is included in the estate. If property is included, the allowance increases to £500,000. Any excess over and above these allowances, and the answer to the question, “How much inheritance tax will be deducted,” is 40%, unless the excess goes to your spouse, civil partner, a charity, or an amateur community sports club.

It’s also worth knowing that if the IHT threshold belonging to your spouse or civil partners wasn’t used to its maximum, the unused value could be added to your own IHT threshold.

Technically, any money you bequeath in your will is not counted as a gift but as part of your estate and is subject to inheritance tax rules.

Can I gift money to my children: UK rules outside inheritance tax

How much money can you gift your children or grandchildren tax-free while you are still alive? It varies, as you will see when you read on, but you need to be aware that it can be subject to tax as a Potentially Exempt Transfer (PET) depending on the amount, and something called the 7-year rule.

The 7-year rule explained

If you die 7 years or more after you have gifted money to your children or grandchildren, it will not be subject to IHT. However, inheritance tax could be due if you die before seven years have elapsed. So, if you’re asking yourself, “Can I gift money to my children tax-free?” – you can, but it depends on something called “taper relief”.

In terms of years before your death, the rate at which taper relief comes into play is as follows:

PET taper relief only comes into consideration when the total amount of money gifted during the seven years preceding your death is over the £325,000 threshold.

Impact on family assets and estate planning

If you regularly make the most of your £3,000 per annum tax-free gift allocation, it’s important to fully understand the 7-year rule because it could potentially impact both the family assets and your estate planning. The more you gift, the less your estate could be worth, but on the other hand, the longer you survive such gifts, the less IHT tax will be due.

How much can you gift tax free?

Every tax year, as far as hereditary tax in the UK is concerned, the answer to the question, “Can I gift money to my children,” is yes, and the and the limit is currently set at £3,000 per tax year. If there are numerous children, the £3,000 can be split. This sum is what is referred to as your “annual exemption.” If you don’t use your exemption fully in one year, you can roll the balance to the next tax year, but no further.

The small gift allowance

You can also make use of your small gift allowance. This covers a maximum of £250 per tax year, and can be used if you haven’t used any other tax allowances for the same child.

What other gifts for children are tax free?

As mentioned earlier, you can bequeath your children or grandchildren up to £325,000 tax-free in your will as part of your estate. But, of course, your estate also covers other things. When considering gifts and inheritance tax relating to your estate, it’s not only money you can include. Other things apply too, such as property and land, personal items (antiques, furniture, jewellery, etc.), and stocks and shares listed on the LSE.

Wedding gifts- including civil partner agreements

If you’re wondering, “Can I gift money to my children as wedding gifts or civil partnership gifts when the partnership is initially formed? – the answer is yes, you can. The rules are as follows:

• To your child – £5,000
• To your grandchild or great-grandchild – £2,500
• To another child (or person) – £1,000

These wedding or civil partnership tax-free allowances can be combined with any other tax-free allowance except the small gift allowance.

Paying regular gift money to your children

You can also regularly gift money to children to help with their costs of living. There is no ceiling to this, and it’s tax-free, provided you can afford such payments and pay them out of your regular monthly income, on which of course you have already paid tax.  This “normal expenditure out of income” gift can be used to pay for the following.

Can I gift money to my children for education or housing?

Two of the biggest financial challenges any child will face in their lifetime are the cost of education and rent costs. Regular gift money can be offered to help with both, and this can come from parents and grandparents.

Providing a monthly allowance for children who become university students can be of huge benefit to the child. But because grandparents want to ensure that the money is used for the right causes and is not just frittered away, you might want to pay for specific expenses such as accommodation or monthly supermarket bills. Whatever you decide as a grandparent, it’s a good idea to have a discussion with the child’s parents first.

Gifting money into a child’s savings account

You can also gift money into a child’s savings account. But if you are considering this option you need to think carefully about the type of account. Ordinary savings accounts don’t offer the best interest rates and the savings run the risk of losing value in real terms because of inflation.

How much money can you gift in this way?  As much as you like, providing it comes out of your normal income or savings. However, these must be regular payments, rather than odd, and sporadic.

Again, these payments can be made in addition to other tax-free allowances, barring the small gift allowance.

The differences between regular lifetime donations and inheritance

Having discussed lifetime gifting and inheritance, let’s now turn our attention to regular lifetime donations. 

As with lifetime gifting, the use of the word “lifetime” in the phrase “regular lifetime donations” indicates that these are donations made while the donor is still alive. The use of the word ” regular” qualifies that these are lifetime donations made at regular intervals. 

Regular lifetime donations are usually made to registered charities such as the British Heart Foundation, the RNLI, Parkinson’s UK, etc.

A survey carried out by the Charities Aid Foundation (CAF) found that 53% of people donating to charity use cash. A third of these people use a regular payment method such as direct debit. Regular giving, in this way, provides a steady and predictable stream of recurring revenue. It enables charities to forecast ahead. Knowing how much money will be received is particularly useful in terms of fundraising plans. It enables charities to make significant investments in the work they do for communities.

Lifetime donations made to registered UK charities are tax-exempt. If 10% or more of the estate is donated to charity, IHT on the balance can be reduced from 40% to 36% if appropriate conditions are met.

When should you start gifting money to children?

Now you know that the answer to the question, “Can I gift money to my children?” is yes, we hope you fully understand your options after reading this article.

Other questions you might ask yourself include, “What are the best savings accounts for children?” and “When should you start your role as gifting parents or grandparents?”

One of the best savings vehicles for children is the Junior ISA, or JISA for short. JISAs come in two types – Cash JISAs and Stocks and Shares JISAs. The best one to use depends on your attitude towards risk. While the cash variant is considered safe, the interest offered is potentially significantly less than that offered via the stocks and shares variant. However, the latter carries greater risk than the former. 

Two things can mitigate risk: diversity and investing long term. Stocks and share ISAs figure well on both accounts. They offer an inbuilt diversity of assets, and if the JISA is started early, the child cannot access the money until they turn 18, thus satisfying the second mitigation factor. If you are still unsure which is the best savings account, you can choose both.

Understanding how to invest money and make the best use of exemptions and tax-free allowances can be confusing. If this is the case, you should seek professional financial advice from a Financial Conduct Authority-approved specialist wealth advisor.

FAQ

What is the annual exemption?

The annual exemption is the amount of money you can give away yearly without paying tax. The sum is currently up to £3,000. If you don’t use it this tax year, you can roll it over to the next tax year, so you could potentially have a £6,000 annual exemption next year.

Do I need to declare gifts to HMRC?

Small cash gifts under £250 and gifts from the £3,000 annual exemption allowance don’t have to be declared to HMRC. However, if you receive any gift above these amounts, you must declare them to HMRC. Failure to declare gifts above said amounts can result in hefty fines.

What are the inheritance tax implications of gifting money to your children? 

Certain gifts can be taxed at 40% (IHT), but gifts such as the £3,000 annual exemption allowance and the £5,000 wedding gift are tax-free. Also, if you’re passing on an estate worth £325,000, your children won’t be liable for any Inheritance Tax. The seven-year rule also exempts your child from IHT as long as you live for at least seven years after giving a gift.