People will have different motivations for wanting to gift monies to their children:
- Some will want to help them when they need funds most, hoping to make their lives easier or more affordable, for example, helping with things like house deposits, school fees or childcare.
- Others will be thinking about inheritance tax. Having worked hard to accumulate their wealth and paying tax throughout their lifetimes, they don’t want to leave these hard-earned funds to the tax man, rather than their families benefitting.
- For many, it will be a combination of the two.
How much am I allowed to gift?
You are able to make unlimited gifts. The only issue comes if you should die within seven years, in which case there could be inheritance tax payable on those gifts.
However, you do have various exemptions available to you, including annual exemptions, gifts in anticipation of marriage and the little used gifts out of income exemption.
- Annual exemption – You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. You can give gifts or money of up to £3,000 to one person or split the £3,000 between several people. You can carry any unused annual exemption forward to the next tax year, but only for one tax year.
- Small gift allowance – You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person. Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax.
- Gifts for weddings or civil partnerships – each tax year, you can give a tax free gift to someone who is getting married or starting a civil partnership. You can gift up to £5,000 to a child, £2,500 to a child or grandchild or £1,000 to any other person
- Gifts out of income – you can make regular payments to help with another person’s living costs. There’s no limit to how much you can give tax free as long as you can afford the payments after meeting your usual living costs and gifts come from regular monthly income. Gifts might include paying rent for your child, paying into a savings account for a child or providing financial support to an elderly relative
But, I worry about losing control.
Many clients worry about gifting, worried that funds might be “frittered away”, or that if their child were to split from their current partner, funds would be lost from the family.
In this instance, trusts might be a possible solution. The type of trust you choose will ultimately depend on what access you might need for yourself and what access you would like the beneficiary to have. However, by writing investments in trust, generally you retain control and might have the flexibility to either appoint funds out or make loans to the beneficiaries.
Will I have enough left for my own future needs?
Often a question that stops people gifting is the concern that they might not have enough for themselves, either for normal expenditure in retirement, or if their circumstances should change, for example, if health should fail and they need long term care.
Through cashflow modelling we can demonstrate to our clients what level of gifts might be affordable.
If large gifts don’t look to be feasible, but they still wish to plan to reduce inheritance tax liabilities, then again trusts could be a potential solution. Different trust structures allow for varying levels of return of capital or regular withdrawals. Ultimately the type of trust we recommend will depend on your needs both now and potentially in the future.
If you wish to discuss any of aspect of gifting or inheritance tax planning, then please do give us a call on 01234 713131.