Households are being urged to take care and check the rules before handing money to family or friends. While gifting money may seem simple, in practice it can be more complicated than it first appears.
That is because in the UK, money given away is not necessarily tax-free, and in some cases, HMRC may treat gifts as part of your estate, even after cash leaves your bank account.
Key HMRC Gift Rules
The main thing to know is that there is an exemption for amounts of up to £250. HMRC rules state:
- A person can give away up to £3,000 free of inheritance tax every year. If this amount is not used in one year, it can be carried to the next, meaning up to £6,000 can then be gifted.
- A person may give gifts of up to £250 to as many people as they want each year, with an exemption that means this will not impact the £3,000 rule.
However, those giving money cannot use two tax allowances on the same person.
Wedding Gift Exemption
A wedding gift exemption is in place. This allows people to give £5,000 to their children, £2,500 to their grandchildren, and £1,000 to anyone else. Unlike other allowances, this can be combined with the annual £3,000 tax-free allowance.
Gifts from Surplus Income
Gifts from surplus income can be tricky to understand, but the key thing to remember is that gifts must come from income rather than savings. As reported by Sky News, a Telegraph freedom of information request discovered that only 430 people used this method in 2022. These payments can be used as long as they follow an accurate and clear pattern and are intended, for example, to pay rent, pay into a savings account, or to give financial support to an elderly relative.
Reporting and Penalties
There is no requirement to notify HMRC when a straightforward cash gift is made, meaning gifts will normally not come to HMRC’s attention at the time of the transfer. In practice, lifetime gifts are usually picked up after the donor’s death, when their estate is being administered. The executor or administrator can review bank accounts and financial records, and if there is an underpayment of tax, then HMRC can charge penalties.
