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Taxes

Do You Have to Pay Tax on Gifts?

Andre Spiteri

April 24, 2019

Close-up of a woman hands offering a gift in plain brown wrapping paper and green string|Sterling banknotes wrapped as gifts, isolated on white|A young girl sitting opening her colorful, pretty gift boxes on Christmas morning

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?

What does HMRC count as a gift?

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:

Money
A car, jewellery or other possessions
Property
A loss in value. So, if your parents own a house that has a market value of £170,000 and they sell it to you for £150,000, the £20,000 they lose on the sale counts as a gift.

Do I have to pay taxes when I receive a gift?

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.

How much money can I receive without paying tax?

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.

Sterling banknotes wrapped as gifts, isolated on white

Working out if inheritance tax is due: Example 1

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.

Working out if inheritance tax is due: Example 2

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.

Can I carry the annual exemption forward?

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.

Carrying an annual exemption forward: Example

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.

Can I receive any other gifts tax-free?

Yes. Aside from the £3,000 annual exemption, the following gifts are also exempt from inheritance tax:

Gifts to your spouse

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 separated and did not live together at all in that tax year
You gave them goods for their business to sell on

Wedding gifts

You can receive

up to £5,000 from your parents
up to £2,500 from your grandparents or great-grandparents
up to £1,000 from a relative or friend

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).

Gifts worth £250 or less

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.

A young girl sitting opening her colorful, pretty gift boxes on Christmas morning

But what about Christmas presents, birthdays and other gifts?

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.

Does helping my parents or children financially have tax implications?

No. HMRC has a tax-exemption which allows you to help with the living costs of your:

Elderly parents
Children under 18
Children over 18 in full-time education
Ex-spouse

What about donations to non-profit organisations?

You can donate money or other valuables tax-free to:

Charities
Museums and universities
Community amateur sports clubs (for the exemption to hold, these have to be registered with HMRC)
Political parties.

For these gifts to be tax-free, you must follow strict rules.

Are there any other ways to avoid paying tax on gifts?

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?

The 7-Year rule: Example

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?

How much tax do I have to pay on gifts?

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.

In summary

As a rule, you won’t have to pay tax on gifts you receive as long as:

The gift-giver didn’t bestow more than £3,000 in total in a given tax year
You’ve received the gift from your parents or grandparents for your wedding (within limits) or the gift is worth less than £250
The gift is from the gift-giver’s surplus income and you can prove making it didn’t change their standard of living
The gift-giver lives for more than seven years after they give you the gift

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.

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