Taxes
If you work, you have to pay tax. HMRC takes a cut of everything you earn. That’s a fact of life.
But what if you receive money or some other valuable asset as a gift, without having to shed a drop of sweat for it? Will HMRC make like Scrooge and force you to pay tax on that too? Or is some — or all of your gift — tax-free?
Before we dive into the specifics, let’s clarify what HMRC means by ‘gift.’
A gift can be anything you receive that has value. This includes:
Well, there’s good news and bad news. Let’s start with the good news. You don’t have to pay income tax on gifts (though you may have to pay income tax on any interest your gift earns). The bad news is that you may have to pay inheritance tax when the person who made the gift passes away.
This isn’t a given. You may be able to avoid paying inheritance tax. However, to do this, it’s important to make sure any gifts you receive are in line with HMRC’s rules.
Let’s go over them.
There’s no set amount. It depends on whether the person who made the gift followed HMRC’s rules.
The general rule is that you can gift up to £3,000 tax-free each tax year. HMRC calls this the annual exemption. Any gifts that fall within the annual exemption don’t attract inheritance tax.
Let’s say you receive £4,000 as a gift from one of your parents. They gave you £2,000 in March 2017 and £2,000 in May 2018.
Unfortunately, your parent passes away in September 2018.
The UK tax year runs between 6 April and 5 April. This means you received the two gifts in different tax years. At, £2,000, the two gifts are lower than the annual exemption of £3,000. So, you don’t have to pay inheritance tax on this amount.
Now, let’s say one of your parents gave you a gift of £4,000 all at one go, on the 7 April 2018.
£4,000 is more than the annual exemption of £3,000. So, once they pass away, you’ll have to pay inheritance tax on this amount.
Yes. Gift-givers can carry forward any unused part of their annual exemption to the following tax year. This means, someone could gift you up to £6,000 in a single tax year and you won’t have to pay inheritance tax on it when they’re gone.
However, you can only carry forward an unused annual exemption once. If you don’t use the exemption you carried forward within the following year, you’ll lose it.
Let’s say your uncle didn’t gift anything to anyone in the 2018/2019 tax year. As a result, he can carry forward his entire £3,000 exemption to the following year.
This means that, in 2019/2020, he could gift you £6,000 tax-free.
But if in 2019/2020 he doesn’t gift you anything either, he’ll lose the £3,000 he carried forward from 2018/2019.
That said, he can carry forward the unused £3,000 from 2019/2020. So, in 2020/2021, he could once again gift you up to £6,000 tax-free.
Yes. Aside from the £3,000 annual exemption, the following gifts are also exempt from inheritance tax:
You and your spouse or civil partner can gift each other as much money as you like, tax-free, during your lifetime. The only condition is that you must both live permanently in the UK.
This applies unless:
You can receive
For the exemption to hold, you must receive the gift before your wedding. And, you won’t be surprised to hear, the wedding has to actually take place. You can’t pocket the cash and play runaway bride (or groom).
Any gift worth £250 or less is exempt from inheritance tax. Unfortunately, the exemption doesn’t count if you also receive someone’s full £3,000 annual exemption. So, if your parents gift you £3,000 in a given tax year, you’ll have to pay inheritance tax on any other gifts you receive in that tax year, even if they’re worth £250 or less.
Here, the rule is that, for the gift to be exempt from inheritance tax, it mustn’t affect the gift-giver’s standard of living. In other words, if you’re giving a gift, you must be able to show you have more than enough income or savings to afford it. The rule applies both to one-off gifts and to regular contributions.
Christmas gifts, birthday gifts and other small presents are unlikely to attract HMRC’s unwanted attention. But if, for instance, your parents help you buy a house, make regular contributions to a savings account in your name or give you another substantial gift, you may need to explain it to HMRC when they pass away.
For this reason, it’s worth speaking to a solicitor or tax adviser to be on the safe side. They’ll help you make sure you do everything by the book, keep good records and, ultimately, avoid getting lumped with a hefty tax bill when the person who gives you the gift is gone.
No. HMRC has a tax-exemption which allows you to help with the living costs of your:
You can donate money or other valuables tax-free to:
For these gifts to be tax-free, you must follow strict rules.
As it happens, yes there are. But timing is everything.
If a gift doesn’t fall under any of the exemptions we’ve discussed, you may still be able to avoid paying inheritance tax on it, on one condition. The person who gives you the gift must stay alive for at least seven years after they give you the gift.
This is known as the seven-year rule. And the gift is called a ‘potentially exempt transfer’. This is because, as the name suggests, the gift could be exempt. But you’ll only know this in seven years’ time.
Does helping my parents or children financially have tax implications?
Does helping my parents or children financially have tax implications?
Let’s say your long-lost uncle gifts you £100,000 in June 2013 (lucky you).
If he’s still alive in July 2020, the seven-year rule will apply. This means the £100,000 will become exempt and you won’t have to pay inheritance tax on it when he passes away.
If, on the other hand, your uncle passes away in April 2019, the seven-year rule won’t apply and you’ll have to pay inheritance tax.
Does helping my parents or children financially have tax implications?
HMRC taxes non-exempt gifts on a sliding scale, depending on how long you received them before the gift-giver’s death. This is called taper relief.
The following table shows the applicable rate of tax based on when you received the non-exempt gift.
[table id=35 /]
The first £325,000 of an inheritance is also tax-free. This doubles to £650,000 between spouses, as long as your spouse is your sole heir.
As a rule, you won’t have to pay tax on gifts you receive as long as:
So, it turns out, the HMRC isn’t as Scrooge-like as you thought they were.
As long as you follow their rules, of course.
