Gifting Money to Family Members: UK Rules

People are asking our estate planning solicitors about the UK rules on gifting money to family members as it is widely reported that the new Labour government may change the inheritance tax rules in the October 2024 budget.

In this article, our estate planning lawyers and family solicitors outline the thought process that should go into gifting money to family members.

For expert family law and estate planning advice call our team or complete our online enquiry form. 

Why gift money to your family members?

In 2020-21, the latest year for which data is available, families received over £2 bn of cash gifts from their loved ones. There are many reasons why money is given to family members, such as:

• You have more than you think you need 
• You don’t want your estate to pay inheritance tax or you want to reduce the IHT bill
• Your family needs a helping hand and could do with all or part of their inheritance now rather than waiting to inherit under your Will 

All these reasons need to be aligned and work together.

For example:

• You don’t want to maximise your inheritance tax savings but leave yourself short because you don’t have enough to live on or to meet unexpected expenditure 
• You don’t want your gift to a family member to end up being shared with their husband or wife as they have decided to separate or divorce 

That’s why it is essential to carefully think through what you are planning to do and why and to get the timing of your gift right. That’s just as important as understanding the UK rules on gifting money to family members.

How much money can you give family members?

You can gift any amount of money to your family or friends during your lifetime but there are rules on whether the money will be notionally added back into your estate when you die and when your estate’s inheritance tax liability is calculated.

If you gift money or assets and inheritance tax is payable on the gift when you die then the liability for the IHT may end up with the recipient of the gift – not your estate. The inheritance tax rules say that the estate pays the inheritance tax on gifts unless the deceased gave away more than £325,000 in gifts in the 7 years before their death. Once that limit has been reached the person receiving the gift pays the tax if the deceased dies within 7 years of the gift.

The IHT rules can have unanticipated consequences. That’s why it is important to understand the UK rules on lifetime gifting and how they could impact your decision-making and your relatives.

Inheritance tax rules and family gifting

Not all estates are liable to pay IHT so it is important to understand your estate’s potential IHT liability before you start estate planning. If your estate is likely to have to pay inheritance tax you can currently give money or assets to the family as a tax-efficient way to give money to your children, grandchildren, other family members or friends.

Gifts given less than 7 years before your death could still be subject to IHT depending on:

• Who you made the gift to
• The amount given 
• The date of the gift

For example, if you give any amount of money or property to your husband, wife or civil partner during your life then those gifts are IHT-exempt provided your spouse or civil partner lives in the UK.

For example, you can give money away that will be IHT free provided you stick to rules on the amount. Under the annual exemption rule, you can give away a total of £3,000 of money or gifts each tax year without the £3,000 being taxable when you pass away. 

In addition to the £3,000 annual exemption, there is a small gift allowance of £250 per person or a gift allowance for weddings and civil partnerships. The wedding gift allowance is: 

• £5,000 to a child
• £2,500 to a grandchild or great-grandchild
• £1,000 to any other person

There are rules on what allowances can be combined in one tax year so it is best to take legal advice.  

If you make regular payments to help a family member with their living costs these can be IHT exempt provided they are normal expenditures out of income and you can:

• Afford the payments after meeting your usual living costs
• Make the gifts out of your regular monthly income rather than savings

Other gifts to family members might fall within IHT liability but the recipient may benefit from IHT reliefs using the 7-year rule.

The 7-year rule

No IHT is payable on any gifts you give if you live for 7 years after giving them as part of the 7-year rule. If you die within 7 years of giving a gift and the gift does not fall within another IHT allowance then the amount of IHT payable at the date of your death depends on when you gave the gift.

Gifts given in the 3 years before your death are taxed at the IHT tax rate of 40%. Gifts given 3 to 7 years before your death are taxed if your estate is over the threshold to pay IHT. The IHT rates taper:

The IHT rules mean it’s important to keep a record of gifts made, the amount or value.

Why gift money to your family isn’t just about inheritance tax 

Inheritance tax mitigation is not normally the main driver for gifting money to family. For example, you may want to give your family money because:

• They are on an NHS waiting list and you want them to have private treatment 
• They can’t afford to buy a home and are finding it impossible to find an affordable rental property 
• Grandchildren are in private education and their parents can no longer afford the school fees because of cost-of-living pressures and the VAT hike
• Your child is getting divorced and they can’t afford to buy a decent house with the money they are getting in their divorce financial settlement 

There are other reasons why you may want to gift money to your family but whatever the reasons it is essential to get comprehensive estate planning and family law advice.

Protecting your wealth 

Protecting your wealth isn’t just about sensible IHT planning. It also involves input from a family law solicitor to make sure that your loved one is protected by a suitable relationship agreement such as a cohabitation agreement, prenuptial agreement or postnuptial agreement.

Our team of specialist estate planning and family agreement solicitors can provide you with the comprehensive estate planning and family relationship agreement advice needed to safeguard your family. 

For expert family law and estate planning advice call our team or complete our online enquiry form.