Brits have been issued a warning over a little-known tax rule that could see them slapped with a bill after receiving gifts this Christmas. While many people have been busy shopping for gifts to give this Christmas, some would prefer to just hand over money to loved ones on December 25. While this is common, there are tax rules that many Brits aren’t aware of, and they might take them by surprise when a loved one passes away.

Many don’t realise that inheritance tax (IHT) can be placed on cash gifts received within seven years before the giver’s death. Money expert at Which?, Ruby Flanagan, explained the rules you need to know about gifting money, and how you can minimise or even eliminate any tax you might have to pay on money gifted to loved ones. While there is no legal requirement for you to state these gifts to HMRC straight away, they will likely be discovered during the probate process after you die.

The executor of your will has to complete IHT forms when you die, examining cash gifts given over the past seven years. Large, unexplained cash withdrawals or bank transfers will likely be recorded as a gift and will be subject to inheritance tax. 

However, there are exemptions to be aware of. If you don’t want your loved ones to face inheritance tax charges after you pass, then consider making small cash gifts. There is a Small Gift Exemption which allows you to give gifts worth up to £250 to any number of people each year. 

Plus, this exemption doesn’t affect your £3,000 annual allowance, so you can use both. Consider giving smaller cash gifts spread over a few years rather than a lump sum that could be subject to inheritance tax charges. 

Flanagan listed other tax rules that many people are not aware of, including the surplus income rule. This exemption applies when you make regular payments to someone to help them with their finances. 

There is no limit on the amounts you can give, as long as it is part of your normal expenditure. However, the payments need to come from your regular income and not your savings. 

For this exception, you must also make sure that there is a clear pattern to the payments. Anything else will be considered a gift and could be subject to taxation.