In answering the question, “can I gift money to my children?” we consider the tax implications of which you need to be aware. In this article, we not only explain the tax implications that apply to large cash gifts but also list the key points you should consider if you gift money to your kids. In addition, we explain the importance of choosing the most competitive savings account.
Can I Gift Money to my Children?: Summary Table
|🤔 Can I gift money to my children?||Definitely|
|📈 How much money can I gift to my children?||There is no amount limit|
|💰 How much is the annual tax-free gift allowance?||£3,000|
|❓ What other gifts for children are tax free?||Cash gifts up to the value of £250 and wedding gifts valued at £5,000|
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.
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 let’s look at inheritance tax first.
Can I gift money to my children via my last will and testament?
Yes, you can, and there is one important, fundamental rule whereby your gift of cash will be exempt from inheritance tax – if the total value of your estate is less than £325,000. Any excess will be taxed at 40% unless that excess goes to your spouse, civil partner, a charity, or an amateur community sports club.
It’s also worth knowing that if the inheritance tax threshold belonging to your spouse or civil partners wasn’t used to its maximum, the unused value could be added to your own inheritance tax 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
You can give your children or grandchildren money while you are still alive. However, under normal circumstances, it could be subject to tax depending on the amount, and something called the 7-year rule.
The 7-year rule explained
If you die within seven years after you have gifted money to your children or grandchildren, it will not be subject to inheritance tax. However, an inheritance tax could be due if you die before seven years have elapsed. So asking yourself, can I gift money to my children tax free in this instance 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:
|Years between the gift and your death||Rate of tax applied|
|3 to 4 years||32%|
|4 to 5 years||24%|
|5 to 6 years||16%|
|6 to 7 years||8%|
|7 years +||0%|
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.
How much money can I gift my children?
Every tax year, as far as inheritance tax is concerned, you can give away £3,000 to your children (if there are several, 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 carry any remainder over to the next tax year, but no further.
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The small gift allowance
You can also make use of your small gift allowance. This allowance covers a maximum of £250 per tax year, and you can use it 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, including 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. This “normal expenditure out of income” gift can be used to pay for the following:
- The child’s rent costs
- Putting into a child’s savings accounts. A child is anyone under the age of 18.
Again, these payments can be made in addition to other tax-free allowances, except the small gift allowance.
When should you start gifting money to children?
Now that you know that the sooner you get started, the better is the answer to the question, can I gift money to my children? The best ISAs for a baby are either a cash Junior ISA or a Stocks and Shares Junior ISA.
But, understanding how to invest money and making the best use of exemptions and tax-free allowances can be confusing. If you find this to be the case, you should seek professional financial advice from a Financial Conduct Authority-approved company.
What is the annual exemption?
The annual exemption is a £3,000 gift value you can give away yearly without paying tax. This annual exemption can be rolled over to the next tax year, so you can have a £6,000 annual exemption next year if you don’t use it this tax 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 will result in hefty fines.
What are the inheritance tax implications of gifting money to your children?
Certain gifts can be taxed at 40% (Inheritance Tax), 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 inheritance tax as long as you live for at least seven years after giving a gift.