Received money as a gift and uncertain whether HMRC imposes a tax on it? You are not alone. Taxes on gifted money can be confusing, especially when you receive a gift from a parent, grandparent, friend, or family member. However, the good news is that in most cases in the UK, a genuine cash gift is not considered taxable income for the person receiving it.
In general, the tax position depends on who gave the money, how much was gifted, and whether Inheritance Tax becomes relevant later. This guide provides a clear explanation of the tax implications of gifts, including when gifts are usually tax-free, the 7-year inheritance rules, and how IHT impacts gifted money.
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Do You Have To Pay Tax If You Get Gifted Money?
When understanding taxes on gifted money, the first step is to understand whether you have to pay tax on it. If you receive a cash gift in the United Kingdom, you are not required to declare it on your Self Assessment tax return, and you are not subject to Income Tax or Capital Gains Tax.
However, the money may be subject to Inheritance Tax if the individual who gifted it passes away within seven years. Furthermore, it is subject to tax when the gifted cash thereafter generates taxable interest or investment income.
Are there Taxes on Gifted Money in the UK?
Many people believe that gifted money is tax-free. In many cases in the UK, receiving a genuine cash gift does not result in an immediate tax bill. However, it is still necessary to understand taxes on gifted money. The main factors in determining whether tax applies to a gift are the value of the gift, available exemptions, and the 7-year Inheritance Tax rule.
What are the 7 Year Inheritance Tax Rules?
When understanding taxes on gifted money, the most important aspect to know is the 7-year inheritance tax rules. In the UK, you can normally gift anything from your estate without incurring any inheritance tax as long as you live for at least seven years after the transfer. If the donor dies within seven years of making the gift, the gift may become subject to Inheritance Tax. In most cases, the tax is paid by the deceased’s estate, although the recipient may become liable in certain circumstances.
How Does The 7-Year Rule Work?
There are specific rules regarding the liability to Inheritance Tax (IHT) on gifts made during a person’s lifetime. Gifts made during a person’s lifetime are generally not taxed immediately. These lifetime gifts are generally referred to as “potentially exempt transfers” (PETs). Commonly known as the seven-year rule, the gift generally becomes exempt from IHT if the giver survives for more than seven years after the transfer.
What Counts as a Gift?
When explaining taxes on gifted money, learning what counts as a gift. A gift is defined by HMRC as anything of value that is given away. This encompasses a variety of assets, such as money, property or land, stocks and shares listed on the London Stock Exchange, domestic and personal goods, furniture, jewellery, or antiques.
What Does Not Count as a Gift?
Any assets, property, or money that you leave in your will do not qualify as lifetime gifts in the United Kingdom. However, these assets remain part of your legal estate upon your death. Inheritance Tax (IHT) assesses lifetime gifts under the seven-year rule; however, items that are passed through a will are subject to distinct estate tax rules and thresholds.
Which Gifts are Exempt from Inheritance Tax?
While understanding taxes on gifted money, you need to know that some gifts are exempt from Inheritance Tax. Gifts between spouses or civil partners are not subject to Inheritance Tax. You can give them as much gift money during your lifetime, as long as they:
- Are legally married or in a civil partnership with you
- Live in the UK permanently
Additionally, there is no Inheritance Tax payable on gifts given to charities or political parties.
How Does Inheritance Tax Impact Gifted Money?
When searching for taxes on gifted money, many people get confused about how Inheritance Tax impacts gift money. Inheritance tax (IHT) is a tax charged on the estate of a dead person, including their property, money, and possessions. Estates with a value of less than £325,000 are not subject to IHT on transfer of assets on death. Moreover, leaving assets to a spouse, civil partner, or charity is entirely tax-free, and it does not use up or change your £325,000 allowance.
What is the Current Rate of Inheritance Tax?
In the United Kingdom, the standard rate of inheritance tax (IHT) is 40%. The rate is charged only on the portion of the estate that exceeds the tax-free thresholds, such as the standard £325,000 nil-rate band. The current rates are:
- 0% Band: The initial £325,000 of an estate is entirely tax-free (0%).
- Reduced Rate: The taxable portion of the estate is subject to a reduced IHT rate of 36% if the deceased donates 10% or more of their net value to a registered charity.
Do You Pay Tax On Receiving a Gift Of Money?
When discussing taxes on gifted money, many people enquire about whether receiving a cash gift generates a tax liability. As mentioned earlier, you do not need to declare a cash gift on your income tax return, and you are not required to pay tax on the gift. However, if the gift giver passes away within 7 years of making the gift, the money you receive as a gift may be subject to IHT. In most cases, any Inheritance Tax is paid by the donor’s estate rather than the recipient. In the UK, the main tax consideration is IHT, which relates to the gift giver and their estate.
How Does The 7-Year Rule Tapering Work?
If the gift giver passes away within seven years of making a Potentially Exempt Transfer (PET), the gift is added back into the estate to calculate Inheritance Tax (IHT). This table highlights the taper relief used by the UK government to calculate taxes on gifted money if the gift giver dies within 7 years.
| Years Between Gift And Death | IHT Tax Rate On Gift |
| 0 to 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7+ years | No IHT |
Note: Taper relief only reduces the tax due on the gift itself. It does not reduce the value of the gift when calculating the estate.
How Much Can You Gift To Family Without Being Taxed?
When it comes to understanding taxes on gifted money, it is important to know that family gifts may become subject to Inheritance Tax if they exceed available exemptions and the donor dies within seven years.
However, with specific exemptions that depend on the circumstances of the gift and the amount given. However, to avoid Inheritance Tax (IHT), your gifts must fall within specific allowances, or the giver must survive for seven years after making the gift.
Annual Exemption
You can give away gifts of up to £3,000 per tax year without it being included in your estate for the purposes of Inheritance Tax. Typically, this exemption may be carried forward for a single tax year if it remains unused.
Small Gift Allowance
You can give away gifts up to £250 to as many different individuals as you want during a tax year. This cannot be combined with the £3,000 allowance for the same individual.
Wedding Or Civil Partnership Gifts
You can provide tax-free cash for civil partnerships or weddings, depending on your relationship with the recipient.
- £5,000 to a child
- £2,500 to a grandchild or great-grandchild
- £1,000 to any other person
Regular Gift from Income
As long as the money comes from your regular surplus income and does not decrease your standard of living, you can make regular gifts totally tax-free. For example, to assist with living expenses.
Can I Gift 100k To My Son In The UK?
When learning about taxes on gifted money, it is important to understand when parents gift a larger amount to their children. In the United Kingdom, there are no legal restrictions on the amount of money that can be gifted to your son. Thus, the tax consequences depend on the Inheritance Tax rules rather than the size of the gift itself. HMRC generally treats a gift of cash to your son as a Potentially Exempt Transfer (PET). If you survive for seven years after the gift, it becomes entirely tax-free. If you die within seven years, your estate calculation may include the £100,000 and may be considered when calculating any Inheritance Tax due if your total estate exceeds the £325,000.
The Bottom Line
Understanding taxes on gifted money is simpler than people expect, because receiving a genuine cash gift in the United Kingdom typically does not result in an Income Tax bill. Even so, larger gifts require care, particularly where Inheritance Tax, the seven-year rule, and available exemptions may apply. To prevent confusion and safeguard both the giver and the recipient, it is beneficial to maintain accurate records and seek guidance before making family gifts.
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Need Support With Understanding Taxes On Gifted Money
Whether you are the recipient or the giver of a cash gift, our accountants can help you. At LimitedCompanyAccountants, we understand the potential implications of taxes on gifted money, evaluate available exemptions, and explain the 7-year Inheritance Tax rule. We also assist you in maintaining accurate records and guide estate planning before the transfer of funds.
Disclaimer: All the information provided in this article is general in nature; it does not intend to disregard any of the professional advice.
