AJ Bell warns on £3,000 gifting rule for giving money to family

AJ Bell warns on £3,000 gifting rule for giving money to family Many people choose to help their children or grandchildren with the cost of living, but this generosity could be included in tax calculations, Martin Lewis warned Financial experts have highlighted a '£3,000 rule' for anyone offering financial support to family members. Numerous relatives, especially those in later life with extra disposable income, often opt to assist their children or grandchildren with the escalating expenses of contemporary living. Yet this generosity could be included in inheritance tax assessments. Finance specialists at AJ Bell stated in September: "Some gifts do not have IHT consequences. There is an annual exemption of £3,000 per person making the gift - so Mum could give one child £3,000 annually, whilst Dad gives the other child the same; these would always be outside the estate. Any unused portion of the £3,000 can be carried forward for one year. "Small gifts of up to £250 per recipient are also exempt - although this cannot be to the same person as any of the annual exempt gift. Gifts can take the form of either cash or assets, so out of the £250 would come things like Christmas and birthday presents. "Wedding gifts of £5,000 to a child, £2,500 to a grandchild, and £1,000 to anyone else are also exempt. You can combine this allowance with the annual allowance for gifts, but not the small exemption." Renowned personal finance specialist Martin Lewis has previously delivered a crucial warning to those providing financial assistance to relatives. On his BBC Podcast, the money-saving expert tackled the topic of inheritance tax. Currently, people can typically pass on up to £325,000 (referred to as the nil-rate band) without taxation at death, increasing to £500,000 when bequeathing a main residence to direct descendants. An unlimited value of assets can be transferred to a spouse, civil partner or charity completely free from Inheritance Tax (IHT), with any unused allowances being transferable. A married couple can pass on up to £1 million tax-free - comprising two £325,000 tax-free allowances and two £175,000 main residence allowances. To qualify for this arrangement, the couple must be legally married. Above this threshold, the inheritance tax liability can be reduced through gifting. However, stringent rules govern this process and its operation. There is also a time restriction in place, meaning any gifts made seven years or more before death are not subject to tax. Martin asked Lucie Spencer from Evelyn Partners to explain all the available gift allowances. He said: "There's a £3,000 rule isn't there?" Lucie explained: "So there's the large gift allowance, which is £3,000 per individual per tax year. And what that means is I can give £3,000, my large gift allowance, either to one person or split between multiple people and also I could reclaim a tax year as well, so if you haven't given that £3,000 in the last tax year, you can effectively give £6,000 today." Martin enquired: "So this is so people understand. This is outside of the 7-year rule. Outside of the giving money from surplus income rule. You, as an individual, can give up to £3,000 per tax year without paying inheritance tax. How do you denote that you're using this large gift allowance? Do you have to note down that's what your intention was or is it just back count?". Lucy recommended: "I recommend with all gifts and that's the small gift allowance of the £250, the large gift allowance of the £3,000 or any gifts are written down on a piece of paper or a spreadsheet and held with your will because when someone passes away and you come to complete their inheritance tax form there's actually a whole list where you have to detail all of the gifts which you've made leading up to your death. "So definitely make a note of it and put it in one column and put 'large gifts allowance for this tax year.'". To summarise, Martin stated: "I can give money from surplus income, I can give money away as long as I last 7 years as a gift without restriction. I can give £3,000 to as many people. The maximum I can give is £3,000, but I could share that between different people. What's the £250 rule?" Lucy explained: "So the £250 rule effectively I could stand on a street corner and give £250 to as many people as I wish. What I can't do is give a person £1 more. So Martin, if I were to give you £250 in this tax year, what I can't do is come back to you and say 'have another £50 on top of that'." When Martin enquired how this interacted with the £3,000 allowance, Lucy clarified: "The person who has been given the £3,000 you can't then give them £250. The way I look at it is you give your daughter £3,000 and your grandchildren £250." Martin then posed the question: "At what age would you say it is sensible for people to start keeping notes on all this type of stuff?" To which tax barrister Harriet Brown responded: "Early 40s." Lucy offered her own perspective: "I would say in your 50s. Maybe when you've received an inheritance so your wealth is more." There are also special occasion exemptions available when gifting money, permitting family members to make financial contributions towards weddings without facing any tax consequences. Harriet outlined the details: "You've got gifts in relation to marriages or civil partnerships, where a parent of either party to the union can give £5,000, so if all four parents gave the maximum, that would be £20,000. Other people who are relations, such as grandparents, could give £2,500, and anyone else could give £1,000 on the occasion of marriage. grandparents, could give £2,500, and anyone else could give £1,000 on the occasion of marriage." To listen to the full podcast click here. For the Martin Lewis Money Saving Expert advice on inheritance tax click here.