Inheritance Tax and making financial gifts to your family

One important consideration is the timing of your gift. For example, your current priority may be to help your newborn grandchild’s family move to a bigger home, or help with private school fees for a primary school-aged child. Later on, it may be to help with driving lessons, pay for school or university fees, or enable them to get on the housing ladder. The timing of your gift, and its intended use, could be a determining factor in the most effective way to give it.

Regulations around gifting and Inheritance Tax (IHT) can be confusing, and the red tape overwhelming at times. Sharing your wealth during your lifetime can be an effective way to reduce the IHT liability on your estate, but perhaps more importantly gives you the opportunity to see your loved ones benefit from your gifts, which can be hugely gratifying.

There are annual allowances available which, if used effectively, mean you can gift without any IHT implications.

Annual exemption

One of the main allowances available is the £3,000 annual exemption. This is the total amount that you can gift without the value being added to your estate. If you don’t utilise this allowance it can be carried forward a year. As a couple, that means you’ll usually be able to give away £6,000, and potentially £12,000 if you haven’t made a gift the year before.

Small gifts allowance

The small gifts allowance allows you to make as many gifts, of up to £250 per person, as you want, although not to someone you have used another exemption on.

Gifts out of excess income

This is a flexible way to make regular gifts out of normal income. These gifts are immediately out of your estate, as long as you can maintain your standard of living without having to draw on additional capital.

This is particularly useful if you have high income levels and low expenditure as it can slow the growth of your estate. Bear in mind that your executors will need to prove to HMRC that these gifts fulfil their criteria, so it’s worth keeping a record of your available income/cash flow each year. Used effectively, these annual exemptions could make a difference to the size of your IHT liability and an even bigger difference to the younger generations in your family.

Gifts in respect of marriage

If congratulations are in order you are able to make wedding or civil ceremony gifts of between £1,000 and £5,000. A gift would need to be made before the wedding and the wedding does need to go ahead!

Larger gifts and trusts

These gift allowances can be particularly beneficial later in your life when the seven-year rule on larger gifts may become an issue. Seven years is the period of time you would need to survive for the gift to fall out of your estate and therefore not be liable to IHT.

There are a number of alternative ways to gift. If the money is needed before age 18, a trust structure is a tax-efficient way to give money, while still giving you some control on how it is used.

Junior ISAs

Alternatively you could fund a junior ISA (JISA) for someone under the age of 18, as once set up by a parent or guardian £4,368 (2019/20) can be invested each year. A junior ISA can be a good option as it grows tax-free, and children and grandchildren can’t dip into it until they reach 18 – but it’s theirs to spend how they want to after that.

Child’s bank account

Alternatively, for smaller gifts a child’s bank account is 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.

Lifetime ISAs

If your grandchildren are older, you might want to consider a lifetime ISA for a housing deposit. Again, you can’t open it for them as a lifetime ISA can only be opened by someone between the ages of 18-39; but if your grandchild opens one, it’s a way for them to save up to £4,000 a year and get a 25% government bonus on top.

Before making any gift, you do need to be sure that you protect your own financial future and have no need for the funds you are gifting. We would always recommend that you speak to an adviser. Please see our Inheritance Tax Services or get in touch with us here to see how we can help. Whatever you opt for, you’ll have the feel-good factor of helping the next generation in a way that’s right for you and them.