Giving away your money while you’re alive; understanding the rules.
If you want to help your children or grandchildren by giving them money for a deposit or university fees, what are the rules?

Many people worry about having to pay inheritance tax when they die, but few are aware that they can give money away while they’re still alive. The rules are quite strict so you can’t give away a fortune, but you may be able to give away more than you think. What you shouldn’t do is try and give away so much money that you don’t have enough left to live on because the chances are you’ll also fall foul of HM Revenue and Customs’ rules.

How much can you give away?
HM Revenue and Customs lets you give away some money every year without risking an inheritance tax bill when you die. The rules say you can give away:

• Up to £3,000 in any one tax year. You can give the £3,000 away to one person or to several. If you don’t give away the £3,000 in total one year you can use up the remainder of your allowance in the next tax year. However, you can’t ‘carry over’ the unused portion beyond one year.

• Up to £250 to anyone you like. You can give away as many gifts of up to £250 as you want to but you can’t give more than £250 to that person. If you do, the inheritance tax free exemption is lost.

• Money when a family member or friend gets married. If your son or daughter gets married each parent can give cash or gifts worth up to £5,000, grandparents can each give up to £2,500 and anyone else can give up to £1,000.

SAVVY TIP: You have to either hand over the money or promise to do so before the date of the wedding/civil partnership ceremony or on the day itself. If the wedding/civil partnership is called off or you give the money after the ceremony and you’ve not promised it first, the inheritance tax exemption doesn’t apply.

• Gifts out of income from normal expenditure. This is an inheritance tax allowance that many people don’t know about and it can be a trickier one to assess. The rules say that if you can afford to make regular gifts out of the income you receive (it can’t be out of your savings or other capital), you can give these away without having to pay inheritance tax The gifts have to be regular, but don’t have to be monthly. For example, you could give a regular allowance to a child or grandchild, give regular Christmas and birthday gifts or pay into a stakeholder pension on their behalf. There's more information on giving away money in your lifetime on the HMRC website.

SAVVY TIP: Karen Ritchie, an independent financial adviser with FPW, says that it’s important to have a good ‘audit trail’ for HM Revenue and Customs. “I recommend that clients write a letter to the person benefiting from the gift, saying that they are making a payment out of their income. They should keep a copy with their will so that the executors know exactly what’s been given away.”

Giving away money and surviving for seven years
There is another way that you can give money away while you’re alive and not face the prospect of an inheritance tax bill, and that’s by using ‘potentially exempt transfers’ or the seven year rule.
It works like this:

• You give away money to your child/grandchild or whoever you like. It doesn’t matter how much you give them.

• You live for at least seven years after you’ve given away the money/assets.

• There’s no inheritance tax bill to pay when you die. Your executors will need evidence of what you gave away and when you did it, but as long as you can show that you gave away the money/painting etc at least seven years before you die, they won’t have to pay inheritance tax.

• Gifts to charities or political parties You can give away money while you're alive (or leave it in your will) and there's no inheritance tax to pay.

Surviving for less than seven years
The tricky bit is that none of us knows how long we will live for but it might still be worth giving money away because if you don’t survive for the full seven years your estate won’t have to pay inheritance tax on the full amount.

• If you live for between three and four years after you’ve given away the money: there will be a reduction of 20% on the inheritance tax bill.

• If you live for between four and five years after you’ve given away the money: there will be a reduction of 40% on the inheritance tax bill.

• If you live for between five and six years after you’ve given away the money: there will be a reduction of 60% on the inheritance tax bill.

• If you live for between six and seven years after you’ve given away the money: there will be a reduction of 80% on the inheritance tax bill.

Using life insurance to pay inheritance tax
You can take out a life insurance policy to pay your inheritance tax bill, either a simple ‘term assurance’ policy that lasts for a set number of years, which will pay your inheritance tax bill if you don’t survive for seven years after you’ve given away some money, or a ‘whole of life’ policy, which guarantees to pay out when you die – no matter when that is.

SAVVY TIP: It's normally a good idea to write a life insurance policy 'in trust' so that the payout doesn't form part of your estate (which means there will be no inheritance tax (IHT) due on the proceeds of the life insurance policy). It's especially important to do so if you're taking out life insurance for the sole reason of paying an IHT bill.

There are pros and cons to each:

• A term policy is a cheaper option: that's because it will only pay out if you die within a certain term (in this case, seven years).

SAVVY TIP: Although the premiums will be relatively low if you’re in good health, you’ll still have the hassle of getting a medical and having all sorts of tests. If you’ve had major health problems you could find the policy costs a lot more or that death relating to this condition is excluded.

• A whole of life policy can cost hundreds of pounds a month: the flip side is that it’s guaranteed to pay out, no matter when you die.

SAVVY TIP: Louise Oliver of independent financial advisers Taylor Oliver says that, even with high premiums, whole of life insurance can be a good deal. “If you - as the person giving away the money - can't afford the premiums it may be that your children or whoever is benefiting from money you're giving them could pay."

Related articles:

Understanding your inheritance tax allowance or nil rate band

Married couples and civil partners can transfer their inheritance tax allowance

When can a will be contested?

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29-06-2011
13-01-2013
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Posted by daddacool dated 2011-07-05 09:11:04
You can give away however much you like, as long as you don't pop your clogs within 7 years of course. Think that needs emphasising a bit more.
Posted by Sarah Pennells dated 2011-07-09 07:14:42
Hi Daddacool and thanks for your comment. You're right that you can give away whatever you like and, as long as you live for at least seven years, there will be no inheritance tax to pay. It's covered in the article but it's always worth emphasising.
Posted by JulieM dated 2011-07-12 20:19:59
I also give regular amounts to charities (or their lotteries), are these amounts included in the £3000 I can give away?
Posted by Sarah Pennells dated 2011-07-13 07:59:46
You're absolutely right - you can give money to a charity or a political party either while you're alive or in your will and it will be exempt from inheritance tax. I was going to write a separate article about charitable giving and IHT but I'll add the point you've made to this article as well. Thanks for highlighting it.
Posted by Betty dated 2011-12-08 18:10:06
I would like some clarification on "gifts out of income" from normal expediture. What is income for a pensioner? Does it include ISA income, 5% Bond income, Building Society income?
Posted by Sarah Pennells dated 2011-12-10 08:30:00
Hi Betty,
Thanks for your question. The income can include employment earnings, interest from bank and building society savings, pension income, dividends from shares and rental income. However, it doesn't include money you've received from lump sums from an endowment or withdrawals from an investment bonds or money you receive from selling shares, for example.
Posted by Betty dated 2011-12-10 13:54:52
Thank you for your prompt answer, Sarah. HMRC do not seem to go into much detail! Women are building large ISA's now in lieu of/or along with pensions.
Posted by Sarah Pennells dated 2011-12-15 19:43:53
Hi Betty,
You're welcome! I'm glad it was useful.
Posted by Tamara dated 2012-05-03 02:48:01
Hi there - a family member wishes to gift me / give to me regular amounts of money she wins from spread betting in the UK - which is tax free. Is there an upper limit to how much I can receive from her tax free winnings each year and do I have to pay tax on those tax free winnings? Thank you very much.
Posted by Sarah Pennells dated 2012-05-17 08:33:42
Hi Tamara,
Sorry for missing your comment. I know you've emailed me since and you have an answer to your question but apologies for not acknowledging this one.

Good luck!
Posted by Nisse dated 2013-03-09 15:28:49
If my savings - now I've sold my house and I am in rented accomodation - are well below £200K - can I give away money I dont need to my children now rather than when I die?
Posted by Sarah Pennells dated 2013-03-09 17:45:54
Hi Nisse, Thanks for your comment. You are right in thinking that if everything you own (such as savings, proceeds of any life insurance policy and investments etc) are worth less than £325,000, your estate does not have to pay inheritance tax. That means you can give away as much as you like without worrying about IHT. However, if you have health problems that mean you are likely to need care - either in a nursing home or in your own home - in the future, you could fall foul of your local authority as you could be seen as deliberately depriving yourself of assets. It's not a problem if you are in good health but you do also need to make sure that you are left with enough for your own needs.
Posted by bernadette dated 2013-03-20 21:46:55
I wish to give my son 40k towards commercial pilot training and this would leave me 16k in savings. Can I do this legally? I currently receive guaranteed pension credit.
Posted by Sarah Pennells dated 2013-03-21 14:15:42
Hi Bernadette, Thanks for your question. There are two possible complications with giving away this money, although neither may necessarily make it 'illegal'. The first is that if you were to need care in the future, either in your own home or a nursing home, the local authority could view your giving away the money as 'deliberate deprivation' of the money. It does depend on whether or not you are in good health at the moment and/or if there is any reason why you might think you may need care in the future. I don't know if you own your own home, but if you do and your home plus savings are worth more than £325,000, your estate (what you leave behind when you die) may have to pay inheritance tax if you don't survive for seven years after making the gift. It's also really important to make sure that you don't leave yourself short of money as you never know what is around the corner...
Posted by hitmytarget dated 2013-03-24 08:14:04
This is a site where you can donate money to help with debt. Can it be done? www.hitmytarget.me.uk
Posted by Sarah Pennells dated 2013-03-24 10:20:50
Hi Hitmytarget, I've had a look at your website and I have to be honest and say I'm not sure why people would donate. I'm all for helping people who've ended up in debt because of a change in circumstances, such as a relationship breakdown or illness, but I also believe that if you take on debts you have a responsibility to pay them off if you can. Your site doesn't explain anything about how you got into debt or who you are. I certainly wouldn't donate by credit card to someone I knew nothing about - form a security point of view as much as anything else.
Posted by Stacey dated 2014-06-18 20:04:34
My dad needs to pay his son a total of £39k after the sale of his property. This consists of Loans owed ,a wedding gift and grandchildren gifts. So £13k I know is defiantly not taxable (grand kids and wedding). But is there a problem paying the rest to him. Thanks.
Posted by Sarah Pennells dated 2014-06-22 15:17:26
Hi Stacey,
Thanks for your question. If your father were to give £39,000 to your brother, he would not have to pay inheritance tax if he is just repaying a loan. However, HM Revenue and Customs would want evidence that he was repaying a loan and not making a gift (perhaps by having evidence of a loan agreement or something). As a general principle, if your father were to give away £39,000 to your brother, he would only have to pay tax on it if a) he didn't live for the next seven years and b) when he died he left more than £325,000 worth of money and property or £650,000 if he's married. I hope that's helpful.
Posted by Maureen dated 2014-11-03 14:43:54
My mother has moved into a care home and just inherited the family home. With the home as an asset she now has enough to fund her care. Can she still make the £3,000 monetary gift each year (as discussed in the inheritance tax allowances)without being penalised by the local authority for care costs.
Posted by Sarah Pennells dated 2014-11-04 08:47:07
Hi Maureen,
Thanks for your question. My understanding - from answers that Janet Davies of Symponia has given - is that local authorities tend to ignore gifts given within the inheritance tax 'lifetime gift' guidelines. However, I don't think there's anything set out in law that says they must ignore this. I would either contact a solicitor who is a member of the organisation called Solicitors for the Elderly or speak to the local authority themselves. I suppose one issue might be how likely it is that the local authority will ever have to pay your mother's care. Are you putting the proceeds of the house sale into a savings account or are you thinking of buying an immediate care annuity to pay care fees? It's not a sales question - I just wondered if there was any danger of the money from the sale of the home running out.
Posted by Lee dated 2014-12-01 20:31:56
Hi, my mother has sold one of her houses that she was to leave to us in her will, and wants to give us the £270,000 so we can enjoy our inheritance now. Can she just put that kind of money in our bank without any trouble ??
Posted by Sarah Pennells dated 2014-12-02 08:06:12
Hi Lee,
Thanks for your question. If the property and other assets that your mum has are worth less than the inheritance tax threshold (£325,000) or less than twice that if your father didn't use his inheritance tax allowance (that means, if he didn't give away money to you or others when he died), your mum can give away her money as she pleases. She has already paid income tax on her money so she is not avoiding tax. It's a different issue if the house is worth £270,000 but she has investments/savings etc worth, say, another £100,000 or more (as that would take her over the £350,000 level). part 2 >>
Posted by Sarah Pennells dated 2014-12-02 08:07:45
Hi Lee - part 2 >> The only thing she should be aware of is that, if she knows or thinks she is likely to need care in the near future and she would now qualify for local authority help with her care because she's given away her home, the local authority may view it as 'deliberate deprivation' and treat her as never having given away the proceeds of the sale of her home.

 
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