Life is full of big expenses; weddings, education fees and getting on the property ladder. So it’s natural that you might want to give your children and grandchildren a helping hand if you can. In reality, you can gift as much as you like to your children or grandchildren, but they might have to pay an unexpected tax charge if you don’t think about this when making your plans.
Inheritance tax (IHT) is the main tax to consider if you’re giving away cash, it’s a tax paid on your estate and certain lifetime gifts after you die. Your estate typically includes your property, money, possessions and so on, less any outstanding debts you have.
Normally IHT only needs to be paid if the value of your estate is above the £325,000 threshold and you may also be able to claim up to £175,000 where the family home passes to children or grandchildren. These allowances apply to each person and may be left to a surviving spouse or civil partner. It could be said, for many people, that your estate only pays inheritance tax on the value over £1 Million!
Perhaps your assets won’t be that much but you might want to continue reading anyway!
If you make gifts during your lifetime, there’s your ‘annual exemption’ to think about, and you may be able to use an exemption for regular gifts made out of income which don’t affect your standard of living or cause you to dip into your savings.
Money given over the £3,000 annual exemption limit could be added to the value of your estate if you don’t live for seven years afterwards. Gifts made to individuals in this way are known as a ‘potentially exempt transfer’ and would be taxed based on a reducing scale.
If you live for three years or more after giving the gift, the person who receives your gift won’t need to pay the full amount, they’ll pay a reduced percentage instead.
|Years between gift and death
|Rate of tax on the gift
|0 – 3
|3 – 4
|4 – 5
|5 – 6
|6 – 7
|7 or more
Capital gains tax (CGT) is another important tax to consider. It’s the tax paid on any profit made when you sell (or ‘dispose of’) a non-cash asset or gift that has increased in value. Giving assets away as a gift is currently classed as ‘disposing of an asset’, which means that you may need to pay CGT if you gift an asset like this to a child or grandchild. These assets will also be subject to the seven-year rule, so IHT and CGT could potentially be payable! The £3,000 gift can be carried forward one year but if you don’t use it then you will lose it. So giving money to your loved ones regularly can be an effective way to minimise the IHT payable on your estate on your death.
Give larger gifts… but be aware of the seven-year rule!
If you want to gift larger sums to individuals, these won’t be counted for IHT purposes – as long as you live for seven years afterwards. If you don’t live for the full seven years, the money you’ve given will be added to the value of your estate. So this means it would use some of your £325,000 threshold. You can’t use any inherited threshold or £175,000 family home threshold against lifetime gifts. If you have used all of the available threshold, the gift will be taxed at 40% (although taper relief could reduce this).
You can open a Junior ISA (JISA) for your child, or you can save into to a JISA on your grandchild’s behalf.
You can currently pay up to £9,000 in total in a tax year into a JISA and that money can be invested, which gives it the chance to increase your child or grandchild’s savings over time. They can access the money when they reach age 18 and they won’t pay any tax on the money they withdraw from the JISA or pay CGT on any investment growth either. You could also think about supporting their Lifetime ISA. Depending on their age, giving money to a child or grandchild so that they can save into a Lifetime ISA could help them save for a property or top up their pension savings.
The Lifetime ISA can only be opened between the ages of 18 and 39, so you can’t open it for them. They could save up to £4,000 a year and get a 25% government bonus on top of that. Gifts to an ISA could be treated as exempt or potentially exempt transfers, depending on their size, how often you make them and if you’ve made them out of spare income. Many grandparents may intend to leave some money to their grandchildren in their Will. But what if you’d like to support them financially while you’re still around? Using a trust can help you do this while offering a number of advantages.
As a trustee, you retain an element of control over the funds and how and when they’re paid, while gifts made to the trust can reduce your estate for IHT. If you’re aged fifty-five or over (rising to age 57 in 2028), you can access your pension savings and you’ll usually get 25% of your pot tax free. So you could consider using some of your tax-free lump sum as a gift to your loved ones. You could also think about nominating a family member as a beneficiary so your pension plan could be passed on to them. Your pension plan isn’t normally included as part of your estate, so your beneficiaries won’t pay any IHT on it, although they could pay income tax on anything they choose to withdraw if you die after the age of seventy-five. This doesn’t apply to all pension plans, so do check with your provider if you’re not sure.
For smaller amounts of cash, bank accounts are practical and easy for family and friends to pay money into. And giving younger children access to their savings can help them manage their own money. Just remember that interest earned is usually low and inflation can eat into any returns. Again, any gifts to them will be outside your estate in seven years (unless they are covered by an exemption).
If a child is getting married, you can give gifts worth up to £2,500 in a year to a grandchild or great-grandchild (on top of your annual exemption). That figure increases to £5,000 if it’s your child.
If you’re a parent making a gift to an unmarried child and they are under eighteen, if that gift earns interest or pays dividends above £100 in any tax year, there are some extra rules. All income from the gift will be taxed as if it were yours. This is to stop parents trying to get a tax break on their own money by using their children’s allowances. This rule doesn’t apply to grandparents or to gifts from parents to their children’s JISAs.
The good news is that there are many tax-efficient ways you can support your loved ones. And keeping records of your gifts will help your loved ones claim the tax benefits they are entitled to after your death.
It is a complex area, so it’s well worth asking for more information so that you can make the most of your money, and your children and grandchildren’s future.