When is the right time to gift money to family members?

Gifting money to your loved ones can be a great way to provide support, share your wealth, and witness the joy it brings.

Imagine the joy of seeing your child’s face light up as you help them buy their first home or when you provide ongoing support to help your grandchildren thrive.

These moments are priceless, but without careful planning, your generosity could inadvertently create financial headaches down the line. That’s why timing is important.

If you’re considering a one-off gift or planning a series of regular contributions, here’s what you need to know about when to gift money and how to stay tax-efficient.

Giving a living inheritance can help your family but needs to be considered carefully

The traditional concept of inheritance often conjures images of wills and estates passed down after death.

This may still be true in your case, but you do also have the option of providing a lump sum to your family as a living inheritance. Doing so could make it possible for them to meet some of life’s biggest milestones and may be more impactful for both them and you.

However, you will still need to consider Inheritance Tax (IHT) even if you’re “giving while living”.

Your family will not usually need to pay any amount upfront, but if you pass away within seven years, the gift may be liable for IHT.

If you live for more than seven years after you have given the gift, it is considered “outside of your estate”, so your family won’t pay IHT on it. But if you pass away within seven years, your estate may be charged IHT.

You can’t always be certain that large financial gifts will be IHT-free, but a Financial Planner can help you weigh up the pros of giving financial gifts compared to the potential tax risk.

Smaller gifts could help your family and reduce the risk of Inheritance Tax

Each tax year, you’re permitted to gift up to £3,000 tax-free to anybody, even non-family members.

This is known as your “annual exemption”, and gifts within it will be considered immediately outside of your estate for IHT purposes.

Here are some additional considerations:

• If you’re married or in a civil partnership, you can combine your annual exemptions and gift a total of £6,000.
• You can “carry forward” any unused exemption from the previous tax year for a maximum of £6,000 (£12,000 as a couple).
• You may only carry your annual exemption forward for one year.
• You can gift your child £5,000 for a wedding or civil ceremony.
• Grandchildren can receive £2,500 for a wedding or civil ceremony.
• Other financial wedding gifts carry an allowance of £1,000.

The wedding allowances exist in addition to your annual exemption.

Finally, you can gift up to £250 to as many people as you’d like, as many times as you want, each tax year, as long as the recipient hasn’t also benefited from another financial gift from you.

Spreading out your living inheritance over many years, while keeping gifts within the annual exemption, may avoid any IHT being levied on this wealth in future.

Gifting from surplus income could help your family with the day-to-day cost of living

Gifting money on a regular basis could help your family with their general living expenses and reduce your IHT liability.

There are some caveats to this, namely that the gifted money must not reduce your standard of living, and the money must come from surplus income. In other words, it must also not come from savings or investments but instead from “leftover” money at the end of the month.

For example, anything you have left over at the end of the month that would otherwise go into a savings account would qualify as surplus income.

You could gift money in this way to support your family’s particular needs, such as help with rent or mortgage payments, paying for your grandchildren’s childcare, or subsidising grocery or utility costs for your children.

Read more: What is “gifting from income” and how could it help you mitigate Inheritance Tax?

Get in touch

Each person’s situation is unique, so deciding how to gift money, and the all-important timing, is up to you. This is where the support of a Financial Planner could be invaluable.

If you’re already a client here at PenLife, talk to your existing Financial Planner to create or review your bespoke strategy.

If you’re considering gifting money to family but aren’t sure where to start, we can help. Email us at enquiries@pen-life.co.uk, or call 01904 661140.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.