Can you explain the tax rules on making gifts to members of my family?

Question

Financial experts often say that one can only give £3,000 a tax year to family members without paying inheritance tax (IHT) on this money. Does this mean £3,000 in total to each relative or £3,000 in total across all family members?

Also, how would anyone know how much money I have given to my family members? Does the rule only apply if you are self-employed and complete a tax return?

JG/by email

Answer

The inheritance tax rules differ depending on who is receiving the money. Gifts to your spouse or civil partner are free of IHT regardless of how much you give. These gifts don’t count towards the £3,000 annual limit or any other exemption either.

Anything else you give away is free from IHT as long as you survive for seven years from the date of the gift. The trick is to keep on living. If you don’t survive for seven years, the person you gave the money to is on the hook to pay up to 40% IHT on the gift, reducing on a sliding scale to nil, depending on how many years you survived and if the value of gifts before death exceeded £325,000.

 

The £3,000 allowance you have heard about is how much you can give away to family members each year that isn’t liable to that seven- year rule.This limit is a value in total and not per family member.

If you haven’t used up this exemption, you can carry it over to the next tax year and make £6,000 of donations tax-free.The maximum exemption is £6,000 a year.

As well as this, there is a £5,000 annual exemption for parents giving to children when they marry, £2,500 exemption for money given to grandchildren when they marry and £1,000 gifts to anyone else getting married.

 

There is also no IHT due on regular gifts from your income, as long as you have enough money left to maintain your normal lifestyle. For example, gifts given at Christmas, birthdays or regular help with school fees. You can also help with a person’s living costs if they are a dependant, without running the risk of IHT.

Finally, you can give up to £250 gifts to as many people as you like in one tax year without IHT being an issue. But you can’t give another £250 to someone who’s already benefited from a gift using a different exemption.

These rules apply to everyone regardless of how they pay tax. HMRC is able to look into a deceased person’s finances to see where money has gone, and that often happens.

If your heirs cannot prove that the money was a gift, then HMRC has the power to determine what it views to be correct and enforce payment based on its estimates.

David Wesley-Yates
David Wesley-Yates is a chartered tax adviser at Red & Black Accountancy.

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