When it comes to gifting children, there are some ways that people can limit their inheritance tax liability.
Making a gift to family and friends while one is alive can be a good way to reduce the value of one’s estate for Inheritance Tax purposes and benefit their loved ones immediately.
However, estate and tax planning is complex so it is important for people to do their research to avoid common mistakes when making a gift.
Millions are supporting their families financially with the most common reason for parents providing financial support is to help with a child’s education (44 percent).
Christine Ross, Head of Private Office (North) and Client Director at Handelsbanken Wealth & Asset Management explained what those approaching retirement should be aware of.
She said: “As the cost-of-living crisis persists, it is often falling to older generations to support their family through the financial hardship.
“It is important for those either heading towards retirement or already retired to ensure their finances are in order – both for themselves, but also for their family members when they need it the most.
“To work out what you could afford to gift, calculate your likely annual expenditure in retirement and allow for an ample buffer beyond that before committing to any significant sums.”
Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.
There’s normally no Inheritance Tax to pay if the value of one’s estate is below the £325,000 threshold.
Some gifts people give while they’re alive may be taxed after their death.
This depends on when they gave the gift. The ‘Taper relief’ might mean the Inheritance Tax charged on the gift is less than 40 percent.
Gifts given less than seven years before someone dies may be taxed depending on:
- who they give the gift to and their relationship to them
- the value of the gift
- when the gift was given
Ross added: “When giving your family members a financial gift, there are a couple of things that can be done to help ensure the money is spent as intentioned.
“There has to be a level of trust and acceptance over what happens to the money once it leaves your account. As a starting point, you could ask the recipients to sign a letter of intent, stating what they will use the money for.
“While this letter is in no way legally binding, it can pull on the conscience of a relative and encourage them to spend as agreed.”
On the Government website, it states:
“Gifts include:
- money
- household and personal goods, for example, furniture, jewellery or antiques
- a house, land or buildings
- stocks and shares listed on the London Stock Exchange
- unlisted shares you held for less than two years before your death”
While someone is alive, they have a £3,000 ‘gift allowance’ a year. This is known as their annual exemption.
This means they can give away assets or cash up to a total of £3,000 in a tax year without it being added to the value of one’s estate for Inheritance Tax purposes.
People can give as many gifts of up to £250 to as many individuals as they want.
For more information about gifting, Britons can visit moneyhelper.com
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