Giving it away: our guide to gifting

The growth in property prices has left many parents with a level of wealth they never expected, but it has meant losers as well as winners. The losers could be their children who despair of ever getting on the property­ ladder.

Many parents find the solution is to give money to their offspring, to provide the deposit they need, or deal with things like university fees or debt. But giving money to your children can also mean giving it to the taxman.

We look at how you can give money to your children without running into tax liabilities.

You can give money away

There is some confusion about gifting. You can give any amount of money you like to your children. The problems come if your estate is liable for inheritance tax (IHT). When you die the first £325,000 of everything you own is exempt (known as the nil rate band). Any amount over this is taxed at 40% before it is passed on to your loved ones, although there are some special concessions to protect your family home.

So, if your estate was worth £450,000, the first £325,000 wouldn’t be taxed. But £125,000 would be taxed at 40%. That’s £50,000 lost by your beneficiaries.

If you are giving money away, it will be classed as part of your estate if you pass away within seven years. This seven-year rule was designed to prevent ‘deathbed giving’ which would see HMRC deprived of its IHT entitlement.

None of us know how long we have. Even if we are hale and hearty, giving large sums could mean tax problems for those we love. Fortunately, there are some allowances which make it possible to be generous even if your estate is large enough to trigger IHT when the time comes.

Annual allowance

This is a tax free allowance for giving money that everyone gets each year. For the 2018/19 tax year, the annual allowance is £3,000.

This £3,000 limit is the total amount you can give each year, no matter how many people you give to.

However, if you have not used last year’s allowance, you can gift £6,000 this year and still avoid IHT.

Small cash gifts are also exempt. Each year you can give up to £250 to as many people you like and there will be no inheritance tax implications

Special occasions

There is another allowance for special occasions. If you plan to give your child a gift of up to £5,000 as a wedding or civil partnership gift, you can do so tax free. This is not quite the loophole it sounds. If you make the gift but the wedding is called off, it will no longer be exempt.

Regular payments

Lump sums attract the attention of the taxman, but regular payments are free from inheritance tax, as long as they come from your income and not your savings. This might mean that you could give children a regular monthly payment to help with the mortgage, rather than stumping up the deposit.

Be careful

You need to be sure you can afford to give money to your family members and consider your own financial future first. Your retirement income, and the potential cost of long-term care all need to be considered.

If you are thinking about helping out someone close to you with a gift of cash, you might want to get some advice from the Continuum team first.

Estate planning is not regulated by the FCA.

Sources:

yourmoney.com – Gifting money to children: what parents need to know – 17th August 2018

money.co.uk – Gifting money to your children: FAQs – 21st August 2018