Sarah asks: “Do I need to pay income tax on gifts that are made from friends of mine?”
Question 5 – Do I Pay Tax On Gifts? – Shownotes
Today’s question comes from Sarah:
Every month I get gifts from 2 people – very kind friends who support me through university. These take the form of bank transfers into a) an ISA and b) a separate savings account. In the past 6 months I have accumulated over £20k in both accounts. I was just wondering if I have to pay tax on anything? They aren’t income, just gifts, but I’m a bit worried about being flagged!
Firstly, give those two people a call and thank them again for their genorosity!!
For your question, they will be no income tax to pay on the receipt of the money from your friends. Gifts are completely exempt from income tax, national insurance or any other salary based tax.
Thereafter, you will also be exempt for income and capital gains tax on any gains made through your ISA account. ISAs are “tax-wrapped”, so once money goes into them, you’ll never be taxed on that money.
Finally, any interest earned through the savings account would be theoretically subject to income tax.
However, you personally won’t pay any as the interest earned will be below your annual allowance, assuming that you are not working whilst at university.
Also, as per the last budget, the chancellor also abolished any income tax on the first £1k of savings income (above and beyond your normal income tax). Therefore, on your £20k, even if it was all in the savings account instead of the ISA and you were earning 5% interest, you still wouldn’t be paying any income tax.
One final tax to consider is inheritance tax. If either of these generous parties were to die within 7 years of making the gift, there could theoretically be some inheritance tax due. However, this will only be the case if their total gifts to everyone other than their spouse in that period (plus their estate when they die) exceeds the IHT threshold, which currently stands at £325,000. The tax rate will be between 40% and 8% depending on when the give was made comparative to the date the donors die, and any exemptions and allowances that apply.
Like I say, it’s fairly unlikely that any IHT would be due, but worth considering as an outside possibility.
So, that is tax out the way. Now what you need to do is create a plan to determine what you are going to do with your £20k. Are you saving it for a house deposit, for example, in 5 years’ time. Or, are you saving some of it for a car next year? Or, is it savings for the long-term.
Where you should save or invest this £20k (and anything you can add to it going forward) will vary greatly depending on the length of time before you expect it to be used. However, this is a whole different question for a different podcast.
So, do you need to pay income tax on gifts? No, but you may need to pay some inheritance tax if the worst was to happen.
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