At a glance
- If you want to offer financial support to your family, annual gift allowances mean you can pass on money amongst your family members, tax-free.
- The annual exemption allows you to gift £3,000 each year – or £6,000 per couple – tax-free to one or more people. And you can carry forward any unused allowance to the following tax year provided you use the currents years’ allowance first.
- Making the most of gift allowances can allow you to help your family now and reduce the overall value of your estate for Inheritance Tax purposes.
We have been living with the cost-of-living crisis since late 2021. Those with young families, and young people in particular are cutting back wherever possible – a quarter of 18-34-year-olds have reduced their rainy-day savings as price rises bite, according to TSB research1.
Further research from TSB revealed that more than one third of parents are financially supporting their adult children. More than half of these said their children wouldn’t be able to cover essential bills without their help2.
Last winter, the government introduced the energy bill support scheme to help households in hardship. This year, however, the government has not made a further commitment. Families and young people may face another long, cold and dark winter. It’s not surprising that many parents are increasingly looking at practical ways they can support their adult children with day-to-day expenses.
You can help your family out and still leave a legacy
Gifting money, either as a one off cash advance, or a regular payment to help cover childcare, could make a world of difference to your loved ones. There are several allowances available in the UK that let you give gifts without incurring a tax bill. Gifts aren’t limited to money; you can gift other assets such as, jewellery, property, land or stocks and shares among the family. Although in practice you ought to be aware of the tax implications in doing so – as other taxes may apply to such gifts.
What are the rules for gifting money?
An individual can give £3,000 a year tax-free (£6,000 per couple) with a gift allowance called the annual exemption. You can split this between several people or give it all to the same person. If you don’t use all of your allowance one tax-year, you can carry it forward to the next. But you can only roll over your allowance for one year.
Making smaller gifts
The small gift allowance lets you make as many gifts as you want of up to £250 per person, as long as you haven’t used another allowance in favour of the same person. You can also give a tax-free wedding or civil partnership gift – you’re allowed to give up to £5,000 to your child; £2,500 to a grandchild or great-grandchild; and £1,000 to anyone else. This is a lovely way to celebrate the big day as well as spread money among the family.
Making regular gifts
A regular amount little and often can help with family budgeting and build financial resilience. You can make regular payments of any amount to help your child or someone else with their living costs tax-free, but you must be able to show that you can afford these payments from your surplus income. You mustn’t compromise your own standard of living, or go without certain things in order to make regular payments. If you are able to make regular gifts, these are classed as ‘normal expenditure out of income’.
If you want to make a gift that isn’t covered by any of these exemptions, you can still make the gift, which will be considered a Potentially Exempt Transfer (PET). A PET will be subject to Inheritance Tax (IHT) if you die within seven years of giving the gift and your estate exceeds the nil-rate band.
What is the nil-rate band?
The nil-rate band is £325,000 per person and includes all types of assets you may own. There is also a £175,000 residential nil-rate band you can use if you’re passing on your home to your direct descendants. Your estate will only be liable to IHT if the total value of your assets exceeds these allowances.
If you die within seven years of giving a Potentially Exempt Transfer gift, it will be counted as part of your estate, and use part/all of your nil rate band. Gifts above the nil rate band, made between three and seven years before your death are taxed on a sliding scale – known as ‘taper relief’.
Always keep a record of any gift you make, and when you made it. It will save your executors time, and potentially tax, when they come to sort out your finances.
Why more of us may pay IHT
Inheritance Tax used to be thought of as something that affected only the wealthiest families. But, as property values have increased, while the IHT threshold has been frozen. This effectively means that an increasing number of estates will end up paying IHT. The latest official figures show that IHT receipts in June 2023 were the highest on record3. Latest forecasts from the Office for Budget Responsibility have suggested that IHT will raise £7.2bn for the Government this financial year4.
Why make tax-free gifting part of your financial plan?
Tax-free gifting has another, very valuable use too. Gifting can reduce the value of your estate for IHT purposes, meaning that more of your money and assets will stay in the family, after you’ve gone. However, it’s important that giving money away today doesn’t jeopardise your own personal financial security, long term. You need to have a plan, know exactly what you can afford to give and what your allowances are. In the past, wealth has been passed down from generation to generation when someone dies. Now, people are living longer, so you may not receive an inheritance until much later in life.
Sharing wealth between generations
St. James’s Place’s recent survey confirms this. More and more parents want to help their children now, rather than making them wait for the inheritance. Nearly one-third (31%) of our clients thought that it was more important to support their children during their lifetime than leave a legacy, although a legacy was still very desirable5. People see it as doing the right thing by your family. Money is moving up and down the generations – whether it’s helping children through a difficult patch between jobs, or getting someone in to help your elderly parents with the gardening.
Financial advice is there to help you find the most tax-efficient way to achieve this, while making sure that you’re not damaging your own financial capability.
Sharing money and assets between families more freely during your lifetime, can help your family when they really need it. And a financial adviser can suggest other tax-efficient ways to pass on wealth, such as maximising your pension contributions and then passing that pension pot to a beneficiary, as pensions don’t form part of your estate.
Improving the long-term financial future of your family
Gifting, legacy planning and tax awareness should all be part of a family-wide conversation. Starting to plan finances as a family, can help build a brighter financial future for each generation.
Passing wealth onto our loved ones is one of the final acts of love we’re able to make. Putting the right plans in place at an early stage will allow greater opportunity to build wealth over time and leave behind as much as possible when you’re gone, without making unnecessary sacrifices along the way.
If you’d like to talk to us about using your wealth to help your family, just get in touch
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.
1Parents Risk Their Financial Security as Pressure Increases on the Bank of Mum and Dad, TSB, August 2022 (Based on a survey sample size of 5,812)
2Parents Risk Their Financial Security as Pressure Increases on the Bank of Mum and Dad, TSB, August 2022 (Based on a survey sample size of 2,003)
3HMRC Tax Receipts and National Insurance Contributions for the UK (Monthly Bulletin), HMRC, Accessed September 2023
4 Money Age, September 2023
5 Intergenerational Wealth Transfer Survey, SJP and The Wisdom Council, 2023, survey size 887.
SJP Approved 12/10/2023