Inheritance tax and cash gifts explained

The legalities surrounding inheritance tax and cash gifts can be complicated. This guide will explain the impact of cash gifts on inheritance tax and explore the thresholds and exemptions to gifting money, enabling you to make an informed decision when it comes to estate planning.
 

What is inheritance tax?

Inheritance tax is the tax payable on the value of someone's estate when they die. This includes on any owned property, assets, personal possessions, and cash. The person responsible for dealing with the estate (the executor) will usually be in charge of paying the inheritance tax to HMRC, if a will has been left.

Inheritance tax is usually paid on any estate value above £325,000 at a rate of 40%. However, there are exemptions. If the amount above the threshold is left to a spouse or civil partner, providing they live in the UK, then there won't usually be any inheritance tax to pay.
 

What is a cash gift?

Giving away money to anyone whilst still alive could count as a cash gift . Once an individual has died, anything left to beneficiaries is part of their estate, not a gift.
 

Cash gift allowances and what it means for you

Everyone has an annual and small gift allowance. This means you can give up to £250 to as many people as you want in any year, without having to pay tax provided another allowance has not been used on the same person. You can also gift up to a value of £3,000 each tax year (your 'annual exemption'), without it being added to the value of your estate. If you don’t use all your allowance, you are able to carry it over, but for one year only.
 

When is inheritance tax payable on cash gifts?

There are situations where someone in receipt of a cash gift might be liable to pay inheritance tax . This is only applicable if more than £325,000 has been given in gifts in the seven years prior to death . Gifts given in the 3 years before your death are taxed at 40%.

The rate of inheritance tax due on the cash gift depends on the amount of time that has passed between the date of the gift and the date of death, HMRC uses a sliding scale as per below:
 

Years between gift and death	Rate of tax on gift
3 to 4 years	32 %
4 to 5 years	24%
5 to 6 years	16%
6 to 7 years	8%
7 or more	0%

If the person survives for seven years or more, there is no inheritance tax to pay on cash gifts.
 

Are there any exemptions where you can give a cash gift tax free?

Aside from the annual and small gift exemptions, there are other exceptions when it comes to paying inheritance tax on cash gifts. As mentioned before, any cash gift to a spouse or civil partner, regardless of the value, won’t incur any tax.

If you're wondering whether you can give a gift tax free, then the following are also exempt:

• Christmas and birthday gifts to your children - It's possible to give your children cash gifts on a regular basis , including into their savings account. This is part of the £250 small gift allowance and to do this you have to show that they are affordable and are paid from regular monthly income, not savings.
• Wedding gifts - Your child can be gifted up to £5,000 and your grandchild or great-grandchild up to £2,500 for a wedding or civil partnership in any given tax year. You can also gift anyone else up to £1,000.
• Payments to help someone with their living costs - This includes dependents or older family members and could cover rent or other financial support. You must be able to afford the payments and they must come from your regular monthly income.
• Charities - Cash gifts left to a charity can lower the inheritance tax to be paid on someone's estate. It's also possible to reduce the inheritance tax rate to 36%, instead of 40%, by gifting over 10% of your net estate to a charitable organisation.

If you make gifts that you continue to benefit from, such as giving a home, or other asset, away but living in the property rent-free, those will still form part of your estate and inheritance tax may still be payable. Worth keeping a note of any cash gifts you give to assist with estate planning and when considering inheritance tax rules.

When it comes to inheritance tax, it only counts on anything that's above the £325,000 threshold.
 

How can we help?

If you’re looking to release funds and give a cash gift to help family or to gift towards a wedding fund, consider our Equity Release options. Our lifetime mortgages can help unlock tax-free funds from your home in a way that's tailored to you. Here at Key Later Life Finance, we offer expert equity release advice so you can make the right decision for you and your family.

Why not discover how much you could release with our Equity Release Calculator? With no obligation to continue, it’s a quick and easy way to find out what funds you might be able to access. If you'd like to chat things through or want some advice on how to proceed with a lifetime mortgage, contact our team today .

Key do not offer tax advice, customers should consult with a qualified tax adviser for advice.

Equity release will reduce the value of your estate and may affect your entitlement to means-tested benefits.

Key Equity Release offers lifetime mortgages only, which is a loan secured against your home. Lifetime mortgages are the most popular form of equity release. With a lifetime mortgage there are typically no monthly repayments to make as the loan, plus roll up interest, is repaid when the plan comes to an end.

Our equity release advice relates to our range of Key branded products only, and our fixed advice fee of £899 is only payable on completion of a plan.