Gifting money to a child? Make sure you don’t give yourself a tax bill

When gifting money to children, there are two taxes you need to pay attention to – income tax and inheritance tax (IHT). 

Gifting can reduce your estate for IHT purposes, but the ‘death tax’ can catch lifetime gifts, so it’s worth recapping the rules. 

Cash gifts exempt from IHT 

There are three main types you can use: 

1. Anyone can gift up to £3,000 a year, either to one person or split between multiple people, without it counting for IHT. If you didn’t use it last year, you can bring that forward and double the money you gift this tax year. 
2. You can give unlimited gifts of £250 or less per person, if you haven’t used another gifting allowance on the same person that year.  
3. You can also make tax-free gifts to people getting married. The amounts vary depending on their relationship to you. For your children the limit is £5,000, while it is £2,500 for a grandchild and £1,000 for anyone else. 

Gifts over these amounts will be subject to the seven-year rule, which means that if you were to die after seven years of the gift, there’s usually no tax to pay. But if you die within seven years the gift is added back into your estate and tax might be payable, on a sliding scale. 

Gifts from income 

You can also make unlimited gifts as regular payments out of your income, if they don’t materially impact your lifestyle. If your retirement income is significantly more than what you spend each month, you could gift regular amounts from that excess to a grandchild or other relative without triggering the seven-year rule. 

This can be used on top of the £3,000 annual gifting allowance, getting you some way to the generous £9,000 Junior ISA allowance each year. 

It’s also possible to contribute up to £2,880 a year (£240 a month) into a Junior SIPP for a child, which will be topped up with 20% tax relief in the same way as pension contributions for non-earners. 

If you want to make gifts from excess income, you’ll need to keep good records of the gifts you make, as proof can be required on IHT forms. 

I’m a parent giving cash to my child 

There’s one extra rule that parents need to keep in mind. Thanks to a little-known rule in the tax system, parents could end up facing an income tax bill for their child’s savings. 

If you’ve given money to your own child that generates income of more than £100 a year, that income counts as your own for tax purposes, even if you’re not getting the benefit of it. It doesn't apply to income from money gifted by anyone else though. 

Sadly, the £100 limit hasn’t increased since it was introduced decades ago, and just £2,000 in a children’s savings account earning 5% a year would breach it. 

The main way for parents to get around is to use a Junior ISA. These accounts are free of tax, even if cash and investments in them were funded by parents.  

Further guidance on gifting is available on the free government Money Helper service, but it’s a complex area, so you should consider getting financial or legal advice.