I am regularly asked by clients about the implications of making gifts to children and grandchildren.
The current exemptions on tax free gifts are set out in the Inheritance Tax Act 1984; and the rates have remained the same since then!Everyone has an annual allowance of £3,000 per tax year which they can gift without inheritance tax being payable. Other useful exemptions are the small gift exemption of £250 per person per tax year, and the very useful exemption of regular gifts from surplus income.This is underused in my experience, and extremely valuable.Take advice on what you need to prove to HMRC to be able to utilise this.
Some people gift to reduce their estate to minimise inheritance tax on their death, whilst others gift because their children need financial help now.Almost half of first time buyers receive help from their parents and if you are considering this you should carefully explore the options – will you be a co-owner of the property?What about Capital Gains Tax? Will it be a loan, and if so, when will it be repaid and what are the interest terms? Will you have a charge on the property or is the money a gift?How will you treat your other children?How does this affect your Will?It’s important to take advice on this so you are not left exposed, and so your good intentions do not cause unintended consequences.
If you are acting as an Attorney for someone, then gifting is very strictly regulated and you should take advice before making gifts.The Courts can approve gifts for tax planning purposes, but you must apply to them for permission.Courts do act against Attorneys who exceed their authority to gift.
Pension freedom was introduced in April this year and 1 in 3 pensioners are expecting their families to ask for funds from their untouched pension pots.This might be a way of helping your family, but you might be losing valuable inheritance tax relief as funds in a pension pot are often free of inheritance tax.You might also end up with an income tax bill.You might be better off gifting from other assets, such as savings, if you can afford it.Take financial advice.
With 20% of retirees regularly helping their adult children financially there are a lot of people looking at these issues.Be clear on what you intend to achieve, take advice, and then relax and enjoy the process of gifting!