Gifts and loans
If you have received some financial support from parents, other family members or friends who can afford to give or lend money, you will want to know what the tax implications are, if any. This depends on whether the support is through a loan or a gift of cash.
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Tax implications of cash gifts
You do not pay tax on a cash gift, but you may have to pay tax on any income that the cash gift generates. For example, if you place the cash gift in a bank or building society account, you may have to pay tax on the interest you earn on that account.
There are additional rules if you are under 18 and receive money from your parents (see below).
You do not need to declare cash gifts you receive on a self assessment tax return.
There may be inheritance tax implications for you and the person who has given you this gift, particularly if the donor (giver) of the cash gift dies within seven years of making the gift.
If the cash gift is being made from overseas, you should check whether there are any tax or other implications in the overseas country.
Tax implications of loans
There are unlikely to be any immediate tax consequences if parents, other family members or friends make you a loan. But if you agree to pay them interest, the person lending you the money may have to pay tax on the interest they receive, depending on their individual tax position.
If eventually the loan is not repaid and the lender says that they never want you to pay it back, it becomes a gift and will then come under the rules for gifts (see above).
A loan does not become a gift until the lender agrees that they are not expecting you to pay it back.
Gifts from parents to children under 18 years old
You are entitled to receive income in your own right no matter what age you are.
If you are:
- under 18 and not married or in a civil partnership, and
- one of your parents (including step-parents) provide you with funds by gift (directly or indirectly), and
- the total funds given to you by that parent produce income of over £100 before tax each year (for example, interest on savings), then
this entire income (not just the excess over £100) will be treated as a ‘parental settlement’ which means it is taxed as your parent’s income, not yours.
If you are under 18 and your grandparents or other family members provide the funds instead, these rules do not apply and they can make any level of gift even if the resulting annual income is over £100.
If you are 16 or 17, the parental settlement rules also apply where your parents make a gift to an ordinary (adult) Individual Savings Account (ISA) in your name and your total income from parental gifts is over £100 before tax each year, even though income arising from ISAs is usually tax-free.
However, if the gift is to a Junior ISA, these gifts do not fall under the parental settlement rules.
If you are a student, you also need to bear in mind that your income counts when looking at the level of student loan you can get, so any income from a parental gift may have an effect on your student finance application.
In situations where someone else holds money, investments or other assets on behalf of a minor, they may be acting as a trustee for the child and might need to register under the Trust Registration Service.
Exceptions to the ‘parental settlement’ rules
Not all gifts from parents will be subject to the ‘parental settlement’ rules; some of the more common exceptions to these rules include:
- gifts or capital sums that are given to you by one of your parents that produce in total less than £100 income before tax each year,
- Child Trust Funds,
- Junior ISAs, and
- pension contributions paid by your parents on your behalf. Your parents can contribute up to £2,880 tax-free and the government tops up your pension pot by 25%, up to a maximum tax-free pension contribution of £3,600 each tax year. So even if you do not pay tax, you will still get the benefit of tax relief being added to the payment.