Whether you’ll need to pay tax on gift money from parents depends on the nature of the gift and when it was made. As we’ve already explained, some types of monetary gifts are exempt from inheritance tax. If you receive what are considered to be everyday small cash gifts, for example, money for your birthday or as a Christmas present, you won’t need to pay tax on it (providing it doesn’t affect your parents’ living standards).
When considering tax on cash gifts, it’s important to remember that everyone has a £3,000 annual gift exemption. In theory, this means that every parent can give up to £3,000 in tax-free cash gifts to their children every year. It’s important to note, however, that the £3,000 allowance applies to the total value of all cash gifts. So if they’ve already gifted £2,000 to other siblings or family members, they will only be able to give another £1,000 tax-free.
Your parents can also gift you up to £5,000 tax-free if you get married. If they choose, they can combine this with their £3,000 annual gift allowance (assuming they haven’t already used it), meaning they can potentially give a cash gift of up to £8,000 tax-free.
Of course, you can receive monetary gifts of more than the amounts referenced above but your parents will need to survive the gift by seven years in order to guarantee that it will be exempt from tax. If your parents pass away within seven years of making the gift, the value of the gift is added back into their estate when calculating inheritance tax. As shown in the table above, the rate of tax payable depends on the number of years between their death and when you received the money.
Even if you don’t need to pay inheritance tax on gifts from parents, bear in mind that there may be other tax implications to consider. Income or gains arising from the gift could result in a capital gains tax charge for instance.
