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Is it better to gift or provide an inheritance?

When it comes to giving your money to those you love, or to preparing your estate for when you’re gone, one of the last things you may think of is tax. But it’s important not to ignore it! Here are some things to consider about cash gifts.
Person holding present | Wealthify
Reading time: 5 mins

Nobody likes thinking about a time when they’re no longer around, but it will happen to all of us, so one of the best things you can do for your loved ones is to be organised. For many, this starts and ends at creating a clear will to pass your possessions onto your loved ones. But, because of inheritance tax, your loved ones may not benefit from the full value of your estate.

Many people are choosing instead to give a ‘gift’ while they’re still alive and kicking. And while this could be a way of getting around inheritance tax there are a few things you should be aware of.


What is a gift?
A gift is exactly what it sounds like, you give away your money and possessions to your loved ones at any point in your life. For tax reasons, a gift could be anything with a value – from money and property to art and jewellery, if it is worth something it could be considered as a gift.

This also includes things that you sell at a loss – for example, if you were to sell your house to a child for less than market value. The difference between the value you sold it for and how much it is worth would count as a gift.

But not every gift is taxed, which means that you’re able to give your money away without it losing value. The rules around this are quite specific and are called ‘exempted gifts’.


What is an exempted gift?
Every tax year, the governments gives you an annual exemption of £3,000. That means you’re able to give away up to £3,000 of gifts each tax year without that amount being added to your estate. In addition to that, you can carry forward any unused exemption from one year previous– so, for example, if you didn’t gift anything in the 2019/20 tax year then you could give up to £6,000 in the 2020/21 tax year.

There are also special occasions where you’re allowed to give more of your money away, including:

  • Weddings or civil ceremonies – you’re able to give away £1,000 per person, and if the union in question is for a grandchild or great-grandchild the amount increases to £2,500, and if it is your child it bumps up to £5,000.
  • Normal income gifts – as long as it doesn’t impact your standard of living, you can gift as much as you want for things like Christmas or birthday presents
  • Helping with living costs – money spent on helping another person, such as an elderly relative or child under 18, is also excluded from your gift allowance.
  • Donations to charity or political parties are also excluded

You’re also allowed to give smaller gifts, up to £250, as many times as you want to as many people as you want within the tax year. However, you cannot gift this to anyone who has received a part of your £3,000 annual exemption.


Do you pay tax when receiving a gift?
The good news is that the recipient doesn’t have to pay income tax when they receive a gift, however, they may need to pay inheritance tax if the person who gave the gift passes away. Depending on how old the person giving the gift is, they could potentially give a much larger sum and be able to see their recipients benefit fully from this gift. This is due to the way in which HMRC tax gifts is given prior to death – often talked about as the seven-year rule, which is also called a Potentially Exempt Transfer (PET).

PET is a handy little rule that means you can gift your loved ones as much as you want, and as long as you survive for seven years or more, they won’t pay inheritance tax on it.

If you do pass on, then depending on how long it was before you gifted the amount your loved ones may have to pay inheritance tax. This is done on a sliding scale, where the longer it was between the gift, the less they have to pay in tax up to seven years, where no tax is paid.

It’s worth noting, that the current inheritance tax threshold is set at £325,000, if the estate is valued at a lower amount than this then there will not be any tax to pay.


Gifting money to children
We mentioned above that gifting money to a child under 18 falls into the exemption category, which means that you are able to give your children as much money as you want to when they are young. This also means that they are not liable to pay income tax on any gifts you give them, however, they may have to pay tax on the interest they earn. But once they’re an adult, the amount you can gift without being taxed will fall into the £3,000 a year mark, unless of course you bank on this amount being a PET gift.

You could save up to £9,000 for them in a Junior Cash ISA each tax year, or even invest it with a Junior Stocks and Shares ISA, without having to pay tax on the amount you gift, or any interest or profits they make. This could be a great way to help them build up a next egg while they’re young, giving them a good financial base for when they reach 18. What’s more, with robo-investors like Wealthify, it’s easy to get started. You simply choose how much you want to gift your child, decide what investment style is right for your needs, and our team of experts will do the rest. We’ll build your child a plan and ensure that all your gifts are working hard, ready for when they turn 18.


Your tax treatment will depend on your individual circumstances and it may be subject to change in the future.


With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.

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