Are Cash Gifts At Christmas Taxable? | moneyfacts.co.uk

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Derin Clark

Derin Clark

Online Reporter
Published: 17/12/2020

Christmas is the perfect time of year to give family members a cash gift, but generous givers should be aware that some cash gifts are potentially taxable. To help make the tax surrounding cash gifts easier to understand, we’ve looked at what tax needs to be paid when giving different amounts to a child or grandchild this Christmas.

How much tax do you have to pay on cash gifts?

Each year, everyone gets an annual gifting limit of £3,000 that is exempt from inheritance tax (IHT). This means that those with three grandchildren can give up to £1,000 each and still remain within the gifting limit, but if £3,000 were given to each grandchild this would go over the limit. An exemption to this is if the gifting limit was not reached the previous tax year, in which case the unused amount can be passed on to this year. For example, if a grandparent did not gift any money last year and then gifting £3,000 to two grandchildren this year, they would still be within the limit.

In addition to this, as long as the giver has not reached their £3,000 annual exemption, they can gift up to £250 to as many people as they like.

Those receiving cash gifts that are below the £3,000 IHT exemption will not have to pay any tax on the money as long as they do not use the gifted cash to earn an income. As well as this, cash gifts to a spouse or civil partner are not taxable.

When do you have to start paying inheritance tax on Christmas cash gifts?

Amounts gifted over the IHT exemption limit of £3,000 per year are potentially liable to pay IHT if the giver of the cash gift dies within seven years of giving the gift. As well as this, no IHT is payable if the person gifting the money has an estate worth £325,000 or less (including property).

If the giver lives beyond seven years, then no IHT is payable. But if they die within seven years, IHT may be payable, the amount of which is on a sliding scale starting from 40% of the value of the gift if the giver dies within three years of gifting the money.

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?.

Alternatives to giving a cash gift this Christmas

Those wanting to gift cash to a child or grandchild under the age of 18 can consider setting up a children’s savings account or Junior ISA (JISA), which would allow regular payments to be made into the accounts, in addition to one-off payments. Interest rates on children’s accounts and JISAs are currently more competitive than those for adults, with the top rate in the children’s savings account chart without opening restrictions standing at 2.50% AER and the top JISA rate at 2.95%.

Another alternative for gifting money to children under the age of 18 is to consider a stocks and shares Junior ISA or an offshore bond and a discretionary gift trust – more information about which can be found on our Investing for children – Stocks & Shares Junior ISA or Offshore Bond in a Discretionary Gift Trust page.

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