MoneyMagpie Editor and financial expert Vicky Parry explores how grandparents can help their families without large tax bills
Grandparents and parents often want to help out their families with cash gifts – but if they’re not careful, a gift can quickly become a financial burden.
Giving money while you’re still here might seem like a great way to avoid Inheritance Tax, but you could end up lumping your loved ones with a big bill.
Inheritance Tax threshold
Inheritance Tax (IHT) is paid on the estate you leave behind when you die. Each person has an allowance of £325,000 on their estate before IHT needs to be paid.
But, with the cost of properties these days, that takes many people over the threshold even if they are cash-poor. The allowance doubles when a couple is married, as the surviving spouse takes on the other’s allowance.
This increases the threshold to £650,000. If you leave your home to your children or grandchildren, that allowance increases to £500,000 (or £1million between a married couple).
Inheritance Tax seven-year Rule
The IHT rate is 40%. That means anything above the allowance is taxed at 40% before your beneficiaries can receive the money or assets from your estate.
This means many grandparents and parents try to implement a ‘living inheritance’ by passing money and assets on while they’re still alive.
However, if you gift outside of the allowed limits, this money could be subject to IHT even if you gave it several years before you die.
There is a seven-year rule on gifting cash and assets: if you give money or property while you’re still alive, it is subject to IHT for the next seven years. So, if you pass away within seven years, IHT is still due on that gift.
There is a taper. If you die within 4 years of the gift, IHT is 32%, 4 to 5 years is 24%, 5 to 6 years is 16%, then 8% for 6 to 7 years. At seven years and one day post-gift date, IHT is not due.
Permitted gifts
There are ways to avoid the seven year rule. First, you can gift up to £3,000 a year to anyone you want (that’s the total amount you can give away, either split into several smaller gifts or as a lump sum).
If you didn’t give any gifts the previous year, you can roll forward the allowance, to make it £6,000. You can also give birthday and Christmas gifts from your regular income of any amount without incurring IHT. This must be from your regular income and not deprive you of your living standards.
Additional gifts
There are some circumstances when you can gift more than £3,000 in a year. If your child gets married, you can give them £5,000, or £2,500 for a grandchild or great-grandchild. You can give up to £1,000 for anyone else as a wedding gift.
You can combine this gift with your allowances. So, if your child gets married and you didn’t make any gifts in the last tax year, that could be a maximum of £11,000 tax-free (£6,000 allowance plus £5,000 wedding allowance).
Regular payments
Another way to support your grandchildren without accidentally lumping them with a large IHT bill is with regular payments. There’s no limit to how much you can give.
There are a few rules. First, you must be able to afford the payments after your own standard living expenses. You can’t deprive yourself to make the payments.
Second, it has to come from your regular monthly income such as your pension. It can’t come from a savings pot. Many people use this option to help grandchildren with things like paying rent, or sending regular payments to a Junior ISA for a grandchild under the age of 18 to establish a safety net when they become an adult.
You can also use it for financial support of a dependent adult child or other relative.
Gifting your house
Be very careful when considering gifting your home or other property to your child or grandchild before you die. First, if you do this shortly before requiring long-term care, it could be seen as deprivation of assets to avoid paying for care.
This could result in the forced sale of the home to recoup funds for your care. Second, if you gift a portion by adding a child to the title deeds as joint property owner, they could face a large Capital Gains Tax bill as the property increases in value over the time they are a joint owner.
If you leave them the property after you die, CGT may not need to be paid if they sell it quickly, as it is only paid on the ‘profit’ i.e., the property value difference between the inheritance date and sale date.
Finally, giving away some or all of your home puts you at risk of being forced out of your home. It can also leave you in a tricky tax situation if you continue to live there without paying market share rent, as it is considered a ‘gift with reservation’ and the house value is included in your estate valuation when you die.
A gift with reservation doesn’t come under the seven year rule, so could be applied ten, twenty or more years down the line.
Consider paying directly
If you want to help your grandchildren out now, rather than waiting to leave an inheritance, there are ways to help. For example, you could consider paying for your grandchild’s university tuition or accommodation fees directly.
Or, if they need support with things like buying their first home, you could help them buy their furniture or pay for contractors for renovations and redecorating. Some grandparents enjoy paying for family holidays to create memories together that their grandchildren may not be able to afford on their own.
This is a good way to provide support to your grandchildren, while having control over what your ‘living inheritance’ is spent on. Taking these costs away from them helps them to save their own cash, so you’re still providing them an opportunity for financial stability – without possibly landing them in hot water with the tax office later on.
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