Cash gifts are one of the most popular ways of showing love and affection to your family and loved ones. However, in the UK, the rules surrounding cash gifts and tax declarations can be complicated.

In this article, we’ve provided a complete guide on the tax implications of cash gifts, when you need to declare them to HMRC, and other details related to that.

Let’s get started and find out if you need to declare cash gifts to HMRC UK.

What is Meant by Cash Gifts?

Cash gifts are cash transfers from one person to another as a token of love or appreciation. This is done without any expectation of compensation in return. Most of the family members give cash gifts to their friends, family as well as other individuals. Cash gifts can be given on various occasions such as birthdays, weddings, graduations, or other special occasions.

Tax Implications of Cash Gifts:

In the UK, cash gifts are usually exempt from income tax and capital gains tax for the recipient. That means that when you receive a cash gift, you are not normally obliged to pay tax on it.

However, there are certain exceptions and considerations:

Gifts from Income:

If the gift is made from income, for example, rental income or dividends, it may be subject to income tax. For instance, suppose a parent provides their child with a gift from their rental income. The gift itself will not be taxed, but the parent will likely have to pay income tax on the rental income used to provide the gift.

Gifts that Give Rise to Income:

If such a gift generates income for the recipient (as in the case of interest paid on savings), taxation may arise from the recipient’s income. For example, suppose you receive a cash gift and place it in your savings account. In that case, you’re earning income from that source and will end up paying tax on the income from that gift.

Capital Gains Tax:

If such a gift consists of an investment or an asset that could be sold profitably, the recipient may be liable to capital gains tax upon selling the property in the future.

Declaring Cash Gifts to HMRC:

Well, there is nothing to declare cash gifts as far as HMRC is concerned, except in specific circumstances where reporting may be required:

Inheritance Tax:

If a person dies within 7 years of giving a gift, that gift is potentially subject to inheritance tax. Most often the recipient would have to report this gift to HMRC. Any gift made by an individual is considered as a Potentially Exempt Transfer (PET) during his lifetime and is exempt from IHT, provided the donor survives for 7 years after making the gift.

Tax Returns:

If the recipient receives a cash gift and uses it to earn interest in a savings account, then they will be required to include such interest in their tax return. The cash gift itself is not taxed, but the interest earned from it is.

Gifts from Parents and Other Family Members:

Gifts received from parents or any other family member are similar to other cash gifts. However, below are some additional considerations:

Parental Gifts:

If a parent gives a gift to a minor child, the income generated from the gift might be subject to income tax at the income tax rate applicable to the parents. This is called “settlement legislation” or “parental settlement rules.” The aim is to prevent parents from shifting income to their children’s names to avoid taxation at a higher rate.

Tax Implications for Parents when Gifting:

It should be noted by parents that gifts to children can have tax-related implications. When gifts are almost always tax-free for the recipient, the parent should consider their own tax planning and reporting responsibilities.

Potentially Exempt Transferring (PETs) and Inheritance Tax

Gifts made during a person’s lifetime that are considered PETs are exempt from IHT if the donor survives for seven years after making the gift. However, if the donor dies within seven years after transferring the gift, the gift may be liable to inheritance tax. The tax rate will depend on the size of the donor’s estate and the value of the gift.

Conclusion

Cash assistance as gifts can serve as a delightful way of providing aid to loved ones or celebrating a special occasion. While a cash gift is usually not subject to income or capital gains tax for the recipient, being aware of the rules helps determine the relevant tax applicability and reporting requirements. Moreover, understanding the regulations about cash gifts ensures compliance with UK tax laws and allows one to enjoy the full benefit of giving or receiving them.

Whenever in doubt whether a cash gift is chargeable or needs to be reported, seeking Charted Certified Accountant  advice is recommended.