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

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.