Cash gifts at Christmas – The essential tax facts you need to remember

Christmas is the perfect time of year to give family members a cash gift. Whether it’s enough to help your children climb onto the property ladder or just a lump sum to help those closest to you, generous cash gifts can carry a taxable charge.

This mostly comes in the form of inheritance tax, which can be complicated. Below we’ve explained some important tax laws in more detail.

Everyone can gift up to £3,000 each tax year without incurring any inheritance tax charges (IHT). To clear any ambiguity, this can be used on one person or divided among several different beneficiaries.

However, if you didn’t make maximum use of this allowance in the previous tax year then this balance will be brought forward and added to your current limit. This is only available for the previous tax year, which means the most your current allowance can ever be is £6,000.

If you haven’t reached your £3,000 limit for this tax year just yet, it might be worth considering your next gifts carefully. If someone hasn’t received a cash gift from you yet this tax year, then you can gift them up to £250 tax-free. This forms part of your small gift allowance, and it can apply to as many qualifying people as you like.  

If you are planning on gifting cash to multiple people for Christmas, this might be a convenient tax-free way to do so.

Besides these broad rules for IHT, it’s worth noting the exceptions. Cash gifts to spouses and civil partners who live in the UK are not liable for IHT charges.  

However, if you plan on gifting your husband or wife any shares for Christmas, rules around Capital Gains Tax (CGT) can become more complicated.

The rule is that if you live with your partner during the current tax year then CGT is not applicable. If they then decide to sell these shares later on, they will be liable to CGT.  

This is a brief explanation of how this works, for more detail it’s best to consult an independent financial adviser.

If you exceed these limits this Christmas, there’s still the chance that you can escape IHT charges.

This is because of the seven-year rule, which states that inheritance tax charges only apply if you die within seven years of making your gift.

If you die within this seven-year period, your beneficiaries will be taxed according to a sliding scale. Essentially, the longer the period between death and when the gift was made, the lower the IHT charge. This is broken down as follows:

Remember IHT will only be payable if the total value of your estate is worth £325,000 or less. This includes the value of all your assets, such as your home.

For more information about how cash gifts are taxed, read our guide How much can I give as a cash gift and how is tax affected?

If your child is under 18 years of age, have you considered making their cash gift through a Junior ISA (JISA)? While your £3,000 tax limit will still apply, any money saved into this account will be free of income and capital gains tax.

However, it’s worth noting that JISAs are designed to encourage children to save for their future, so your child won’t be able to access this cash gift until they’re 18 years old. It’s also worth noting that you can only deposit a maximum of £9,000 a year into your child’s JISA.