Gifting money to children tax-efficiently

  • 3 min read
  • Last updated 21 Nov 2023

If you understand it, tax efficiency is the gift that keeps giving. But let’s be honest, most people don’t understand it, and it breaks our hearts 💔

But there’s no time like the present to correct this! So, in the spirit of Christmas, we’re giving you the ultimate guide to gifting money to children tax-efficiently 🎁

The parameters of your present 

Let’s start with the basics – the bits you want to know, the facts, the stats and the best way to gift children money: 

  • £3,000 is your total personal allowance
  • If you want to gift more than one child, you’ll need to divvy up your £3,000 – let’s hope there aren’t any favourites 🤞
  • It’s a per-person allowance, meaning households with more than one parent can gift £3,000 each per year
  • If you don’t use your total annual gift allowance, you can carry it over to the following year, but this is a one-time-only kind of situation…
  • This rollover means you could gift your child up to £6,000 in one tax year 🎲
  • If you don’t use your allowance in the second year, the tax-free allowance resets to £3,000

Less is more…?  

In most cases, you can gift smaller sums of money, up to £250 a year, to as many people as you want. 

The catch? You can’t combine this with your annual tax-free gift allowance 😔

Don’t be a party pooper 

Everyone likes to be treated once in a while and that doesn’t change as children grow. 

But, what does change is their employment status 🧑‍🚒

If you’re worried that gifting cash might push your children into a higher income tax bracket, don’t be 😌

Surprisingly, HMRC doesn’t count gifts as income. 

So, the good news is that your children won’t have to pay income tax on any money you gift them. The bad news? You might have to delay your retirement… just kidding!

Get hitched quick 💍

No, we’re not recommending you do that. But, did you know that there’s an allowance if you’re giving money to your child as a wedding gift? 👰                                                          

If the happy couple hasn’t broken your bank already 🥲, you can gift your children up to £5,000 to make their day extra special. 

And with beverages flowing at the reception, you might decide to combine this with your £3,000 annual gift allowance, meaning you could gift up to £8,000 tax-free! 💸

Cash me if you can

Was it HMRC that once said, gift from the heart, not the head ? 

Okay, maybe not 🫣, but they did set a limit of £100 on the interest a child under 18 can earn tax-free on the money you gift them ❌

Why? To prevent parents from using their child’s tax-free allowance to avoid income tax on their personal income 😱

But, fear not, this limit doesn’t apply to money gifted from grandparents, relatives or friends 😅

Interest earned on savings in a Junior ISA or Child Trust Fund is also exempt from this limit!

Keep your receipts 

If you’re planning on gifting your child over £3,000 without paying tax, you’ll need to live more than seven years after they receive it – no pressure 🫠

But, if you pass within seven years of giving the gift, it may be subject to Inheritance Tax. The amount of tax charged depends on how long before your death the money was gifted.

For this purpose, you should keep a record of the nature of the gift, who you gave it to, when you gave it, and how much it was worth 🖊️

Inheritance Tax (IHT)

Inheritance Tax is paid by a person who inherits money, assets, or property from someone who has passed away

  • You’ll pay 40% IHT if the value of the estate you receive is over the £325,000 threshold
  • You won’t pay IHT if the person leaving you the estate is your spouse, or civil partner, or they gift you everything seven years before they pass away
  • If you’re giving away your main home to your children or grandchildren, your threshold can increase to £500,000 (£325,000 tax-free limit + £175,000 main residence allowance)
  • You’ll only be charged on the part of your estate that’s above the threshold
  • You can pay your Inheritance Tax on things that may take time to sell in equal annual instalments over 10 years

Here’s an example:

  • If your estate is worth £500,000 Inheritance Tax will be 40% of £175,000 (£500,000 minus the £325,000 threshold)
  • However, you can pay IHT at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will

Rate my gift 

Your children will pay inheritance tax if you pass away within seven years of gifting them a sum of money over your personal allowance.

These are the rates: 

Years between gift and deathTax rate 
Less than 3 years 40%
3 to 4 years 32%
4 to 5 years 24%
5 to 6 years 16%
6 to 7 years8%
7 years or more 0%

Let’s wrap it up

To gift money to your children tax efficiently, remember these three things:

☝️Don’t gift over your yearly tax-free gift allowance of £3,000 

✌️Make the most of wedding allowances, roll-overs and other tax-free occasions

🤟Gift everything sooner rather than later so you don’t have to deal with high IHT- if you’re psychic you’ve got the upper hand here…

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