Gifting money to your children: FAQs
Helping your children out financially is something most parents would like to do, but you need to be careful they don't end up giving it away to the tax man. Here's what you need to know.
What is inheritance tax?
Your estate (the property, possessions and savings you leave behind) is valued when you die. Before it is passed on to your loved ones, the government deducts a percentage of the value. This is known as inheritance tax.
The first £325,000 of anything you own is exempt from inheritance tax (known as the nil rate band), but any amount over this is taxed at 40%.
For example, if your estate is worth £425,000, the first £325,000 wouldn't be taxed. But £100,000 would be taxed at 40%, so £40,000 would be deducted before the balance is passed to your next of kin.
Tax rules apply and may be subject to change.
The exception to this is if you are married, as you can pass your full estate to your spouse in the event of your death without paying any inheritance tax.
By doing this you also pass on your £325,000 inheritance tax exemption, so £650,000 of your combined estate would be free from inheritance tax when they die.
Find previous year's Inheritance Tax thresholds here
What is the residence nil rate band?
Also known as the additional threshold, the residence nil rate band (RNRB) came into effect in April 2017. If an estate is valued higher than the Inheritance Tax threshold, it may qualify for an additional threshold before any tax needs to be paid.
You can find out more on the GOV.UK website
Fact
Inheritance tax also applies to any monetary gifts you give in the 7 years preceding your death.
Exemptions and allowances
Aside from the Inheritance Tax exemption threshold, there are other exemptions and allowances that allow you to gift money without paying tax:
Annual allowance
This is a tax free allowance for gifting money, that everyone gets each year.
The annual allowance is £3,000 for the 2017/18 tax year, which means you can gift up to £3,000 to your children (or to anyone else you choose) without paying inheritance tax.
This £3,000 limit applies as a total annual amount, so if you had already given £2,000 to one child you could only give up to £1,000 more during that financial year.
However, if you have not used last year's allowance, you can gift £6,000 this year and still avoid tax.
Special occasions
If you plan to give your child a gift to celebrate a special occasion, you may not have to pay inheritance tax.
Parents can give up to £5,000 to children, as a wedding or civil partnership gift, tax free.
However, this only stands if the marriage goes ahead. If you make the gift but the wedding is called off or cancelled, then it will no longer be exempt from inheritance tax.
Small cash gifts are also exempt, and each year you can give up to £250 to as many people you like without paying inheritance tax.
You can find full details of gift exemptions on GOV.UK
Regular payments
Regular payments are exempt from inheritance tax, as long as they come from your income (not your savings) and don't affect your lifestyle. For example, you don't have to sell your home to fund the payments.
Consider paying your children a regular amount each month rather than gifting a lump sum, to avoid paying tax.
What about selling your house?
It's likely that any value tied up in your home is the main asset that will push your estate over the inheritance tax threshold.
However, your children could still pay inheritance tax beyond the 7 year exemption rule if you sell your home and:
Gift the money to your children
Move in with your children
Pool your funds to buy a new home together
This is because 'gifts with reservation of benefit' aren't exempt, as you will continue to benefit from them.
For more information on gifting property, or selling property and gifting the money to your children, visit the GOV.UK website.
Income tax
Income tax is not paid on gifts, as they are not classed as source of income by HMRC.
As long as your child is under 18, they will not pay income tax on any gifts you give them:
Children under 18
There is no limit on the amount of money you can give your child each year, but if the interest they earn on the money exceeds more than £100, it will be taxed.
This is to prevent parents from using their child's tax free allowance to avoid paying income tax on their own money.
The income tax threshold that applies to adults also applies to children. If they earn more than this in income during the course of the tax year, they will need to pay income tax on any excess.
Junior ISAs
Following the withdrawal of the Child Trust Fund, the government has introduced a replacement in the form of the Junior ISA. They are designed to help parents save for their children's future and are tax free.
The interest your child earns on money you pay into their Junior ISA doesn't count towards the £100 per parent tax free interest limit.
Junior ISAs are available for any child under 18 who doesn't already have a Child Trust Fund, and you can contribute up to £4,260 each tax year.
Find out more about Junior ISAs here
Visit GOV.UK for more income tax information
Loss of benefits
Although gifts are not classed as a source of income, and therefore cannot put your child's earnings over the benefit thresholds, some benefits are dependent on the amount of savings you have in the bank.
For example, if your child is currently receiving income support and your gift would see their savings increase to over £16,000, they could lose their benefits as a result.
Tax rules apply and may be subject to change.
To avoid your son or daughter losing any income from benefits, check if a gift you wish to give would cause any issues.
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