Gifting money and Inheritance Tax

Inheritance Tax

Getting on the property ladder has become increasingly harder for young people in the UK, and contributions from parents and other family members have become much more common to help first-time buyers with a house purchase.

Inheritance Tax

The “Bank of Mum and Dad” as it is often referred to, is gifting money to help young people start their adult lives, assist in paying for weddings, and/or help with buying a house.

However, passing down wealth takes careful planning, and it is essential that you have a good understanding of gifting/loaning money to relatives and any tax implications this may bring.

Here we look at different types of gifting and the importance of Inheritance Tax planning.

Billions of gifts and loans

Parents in the UK gift or loan their children an estimated £17 billion each year, mostly to help with buying a house or as a wedding present, according to recent research from the Institute for Fiscal Studies (IFS).

Most transfers come from parents aged over 50 to children in their late 20s and early 30s. Around 30% of young adults receive at least one substantial transfer (of £500 or more) over any eight-year period.

gifting young people

The majority of this transfer comes in the form of gifts, while £3.3 billion is in the form of loans, although these are frequently lent with very favourable terms and low expectation of them being repaid.

The property ladder

Half of the value of gifts received was used for property purchases or improvement. Those using transfers for this purpose received over £20,000, on average. Those in the least wealthy third are relatively more likely to report using gifts for the purchase of a new car, to pay off debts or for educational expenses.

Whatever the purpose of a gift or loan, it can attract the attention of the tax authorities with the potential for Inheritance Tax (IHT) or Capital Gains Tax (CGT) liabilities.

Lifetime gifts

Many smaller or regular lifetime gifts are exempt from Inheritance Tax, while larger gifts may become exempt after seven years, so a strategy of making gifts in your lifetime can substantially reduce your taxable estate on death.

Inheritance Tax

You can also take out life insurance to cover any Inheritance Tax which might be due following your death within seven years of making larger gifts. However, potential CGT must be taken into account with this option.

Inheritance tax

Inheritance Tax is currently payable where a person’s taxable estate is in excess of £325,000. Therefore, if you own your own house and have some savings, your estate could be liable. 

The good news is that there are a number of allowances and strategies that may help to reduce your liability to Inheritance Tax. This may include utilising the residence nil-rate band, which was introduced with the intention of enabling a ‘family home’ to be passed tax-free on death.

inheritance tax

It could be said that the art of Inheritance Tax planning is to give away as much as possible during your lifetime, while still keeping enough to ensure that you and your spouse can live a comfortable and fulfilling retirement. 

Full rate

The full rate of tax is 40% on the estate value in excess of £325,000. Taxable gifts made up to seven years before death are added back into your estate and tax is calculated on the inclusive value. But to the extent that such lifetime gifts made between three and seven years before death exceed the tax threshold, the associated tax is discounted by up to 80%.

In addition, the ‘residence nil-rate band’ (RNRB) applies where a residence is passed on death to direct descendants, such as a child or a grandchild. The RNRB is set at £175,000 for 2022/23. 

Trusts

Trusts allow you to make gifts without giving the recipient complete control over the asset and/or the income it generates. Gifts into trust may result in an Inheritance Tax liability, depending on the nature, timing and terms of the gift and the value of other chargeable gifts in the preceding seven years. Ten-yearly and exit charges may also arise.

inheritance tax

You can also create a discretionary trust in your Will to allow your trustees to decide how your assets should be distributed, giving a (non-binding) letter of wishes and taking into account all relevant circumstances at the time. This option has the advantage of deferring all CGT charges.

How Blue Spire can help

It is important to remember that planning to minimise your Inheritance Tax liability is a team effort.

inheritance tax

Blue Spire can help to discuss your options and provide advice on where you may be able to make substantial savings and reduce your tax.

Please do not hesitate to contact us for assistance with planning your family’s financial security.

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