Every year, millions of parents across the UK give money to their children. Whether it’s weekly pocket money or the deposit for a house, there is a range of factors that you need to take into account when gifting money to your son or daughter. Parents might ask themselves: How much money can I gift my children? Are there any regulations that I need to consider? Will my child miss out on benefits if I gift them money?
Our guide looks at the rules for gifting money to children. Keep reading to find out more.
How much can I gift my children?
You can gift your children an unlimited amount each year, with some caveats:
- Inheritance Tax rules could result in tax implications for your children or grandchildren when you gift them cash or assets. Depending on the value of the gift and when they receive it, the recipients may need to pay Inheritance Tax.
- Children are only able to earn a set amount of interest on any cash gifts from a parent before they’ll need to pay any tax. If they earn any interest beyond the limit, this will be taxed.
You can find out more about inheritance and interest rules below.
Tax free gifts for children
If you decide to start investing in your children’s future or want to give money to your kids, you may have a concern that they might be pushed into a higher income tax band, or that they will have to pay income tax on the gift that you give them. Let us explain how to make tax free gifts to children.
HM Revenue and Customs (HMRC) does not count cash gifts as ‘income’, meaning that your children are not liable for income tax on gifts that you give them.
You do not need to worry about income tax when gifting cash to your children – the only way they may face any tax liability is if they save/invest the money and make interest on it.
Gifting money to children under the age of 18
As HMRC does not count cash gifts as ‘income’, there is no limit to the amount of money you can gift to your child each year.
However, if they are under the age of 18, there is a limit to the amount of interest a child can earn on the money that you gift to them. This is to prevent parents from using their child’s tax-free allowance to avoid paying income tax on their own money.
Children can earn up to £100 in interest on any money given to them by a parent without paying any tax. Anything over £100 will be taxed as if it were the parent’s income.
Note that the £100 limit doesn’t apply to money given by grandparents, relatives or friends.
Saving in a Junior ISA
Junior ISAs are designed to help parents to save for their children’s future. The main advantage of them is that all returns are tax-free, and the interest earned on a Junior ISA does not count towards the £100 ‘per parent’ tax-free interest limit.
Junior ISAs are available for any child under 18 who wasn’t eligible for the now-defunct Child Trust Fund, and you can contribute up to £4, 368 this tax year, although this limit is reviewed every year and usually increases. Shepherds Friendly offer a Junior ISA which you can find out more about on our website.
Gifting money to your children – the Inheritance Tax implications
As they get older, many parents decide to pass on assets – cash, savings, valuables and property – to their children. While you can gift whatever you like, there are tax implications for some sorts of gift.
Each tax year, you can give away £3,000 worth of gifts (your ‘annual exemption’) tax-free. You can also give away wedding or civil partnership gifts up to £1,000 per person (£2,500 for a grandchild and £5,000 for a child).
You can also give your children regular sums of money from your income (see below).
When you die, the first £325,000 of your estate can be passed to your children tax-free. If you pass your home to your children, including adopted, foster or step children – or your grandchildren, your allowance increases to £425,000.
If you give away gifts worth more than £325,000 in the seven years before your death, the recipients will be liable for Inheritance Tax, on a sliding scale.
Gifting your child a small, regular sum from your income
If you are still working and pay your child small gifts from your income, these payments won’t be subject to additional tax. As far as HMRC are concerned, you have already paid income tax and so you can spend the money as you like.
However, you should remember that regular payments must come from your income, not your savings, and the rules state that they mustn’t significantly impact your standard of living. For example, you couldn’t sell your home to fund these payments.
If you are making regular payments, make sure you can prove these are from your income.
You may also want to consider that your child spends money in a regulated and healthy way. Learning financial basics is essential for your child if you gift money to them – read our guide on fun ways to teach children about money.
Make sure your child doesn’t lose out on benefits
One factor that you should consider when gifting money to your children is whether it impacts on any benefits they may be entitled to.
Some benefits are dependent on the level of savings that a recipient has. For example, a person is not eligible to claim for income support if they have more than £16,000 in capital.
If your financial gift takes your child’s savings over this limit, they could lose certain benefits.
With any investment product, it is important to remember that capital is at risk and you may end up with less than you put in.
You can also find out about gifting money to grandchildren, gifting money to parents, or more generally, gifting money to family here.
