How Much Money Can You Gift a Family Member Tax-Free in the UK?

Gifting money to family members can provide financial support and help manage your estate. In the UK, understanding Inheritance Tax (IHT) rules on gifts is important, as certain transfers during your lifetime can have tax implications. Specific allowances and exemptions exist that allow individuals to give money without incurring IHT. Navigating these regulations ensures your generosity benefits loved ones as intended, without unexpected tax burdens.

Annual Allowances and Exemptions for Gifts

The UK tax system provides several allowances that permit individuals to make immediate tax-free gifts without IHT implications. Each tax year, you can utilize an “Annual Exemption” of £3,000. This amount can be given to one person or split among several individuals. If this exemption is not fully used in one tax year, any remaining allowance can be carried forward to the next tax year, but only for that single subsequent year. For example, if you gift £1,000 in one year, you could gift £5,000 the next by using that year’s £3,000 allowance plus the £2,000 carried forward.

Beyond the annual exemption, a “Small Gift Exemption” allows for unlimited gifts of up to £250 per person in any tax year. However, this allowance cannot be combined with any other exemption for the same recipient in the same tax year. For example, you cannot give someone £250 under the small gift exemption and also a portion of your annual exemption. Specific exemptions also apply to “Wedding and Civil Partnership Gifts,” where parents can gift up to £5,000, grandparents or great-grandparents up to £2,500, and any other person up to £1,000, provided the gift is made before the wedding. These wedding gifts are exempt from IHT and can be used in conjunction with the annual exemption.

Gifts made between spouses or civil partners who are both UK domiciled are entirely exempt from Inheritance Tax, with no monetary limit. This means individuals can transfer unlimited assets to their partner during their lifetime without IHT implications. Additionally, gifts made “out of normal expenditure” can be IHT-exempt. To qualify, these gifts must be made from surplus income, form part of a regular pattern of giving, and not reduce the donor’s standard of living. Careful record-keeping is particularly important for this exemption to demonstrate that the criteria have been met.

Potentially Exempt Transfers and the Seven-Year Rule

Gifts that do not fall under the immediate annual allowances or other specific exemptions are generally classified as “Potentially Exempt Transfers” (PETs). A PET is a gift made to an individual that becomes fully exempt from Inheritance Tax if the donor survives for seven years after making the gift. There is no limit to the value of a PET when it is made, and no IHT is payable at the time of the transfer.

The “seven-year rule” dictates that if the donor dies within this seven-year period, the PET becomes a “Chargeable Lifetime Transfer” and may be subject to IHT. The value of the gift is then brought back into the estate for IHT calculations. The standard rate of IHT is 40%, applied to the portion of the estate that exceeds the Nil-Rate Band (NRB). The Nil-Rate Band (NRB), the tax-free threshold for estates, is currently £325,000.

If the total value of gifts made within the seven years before death, combined with other assets, exceeds the donor’s available NRB, IHT may be due. However, “Taper Relief” can reduce the amount of IHT payable on gifts if the donor dies between three and seven years after making the gift. This relief operates on a sliding scale, reducing the tax liability progressively the longer the donor survives beyond three years, up to seven years. Taper relief applies only to the IHT liability on the portion of the gift exceeding the NRB, not to the gift’s value itself.

Maintaining Records of Gifts

Keeping accurate and comprehensive records of all gifts made is a practical step for individuals and their families. This is especially important for larger gifts or those intended to be Potentially Exempt Transfers, as these may be scrutinised by tax authorities. These records become crucial for the donor’s executors, who are responsible for administering the estate after death.

For each gift, key information should be documented, including the precise date the gift was made, its monetary value or a clear valuation of assets, and the full name and address of the recipient. It is also advisable to note which specific exemption or allowance the gift was intended to fall under, such as the annual exemption or a wedding gift exemption. Retaining supporting documentation, such as bank transfer confirmations or formal gift letters, can further substantiate the nature and timing of the transfer.

Good record-keeping simplifies the estate administration process and helps demonstrate to HM Revenue & Customs (HMRC) that gifts qualify for stated exemptions, potentially preventing disputes or unexpected tax liabilities.