As more and more parents and grandparents are stepping in to help the younger generation get on the property ladder or fund living costs whilst in higher education, it appears that there is a general misunderstanding about the effect this could have on their own financial situation.
Subject to certain exemptions and allowances, any gifts which are given in the seven years prior to a person's death could be liable for inheritance tax, depending on the overall value of the estate. For example, if a person gives their child a lump sum of £20,000 for a property deposit and then fails to survive for seven years afterwards, it will be included as part of their estate for inheritance tax purposes.
It is important that people are aware of the rules to ensure that they can make the most of the available allowances for lifetime gifts. For example, every person can give away up to £3,000 per year without it affecting their inheritance tax position, so it may be preferable to try and give a large gift in installments over a number of years instead of in one lump sum.
Furthermore, gifts of certain amounts for specific celebrations such as weddings will also be exempt. Small gifts to any number of separate people of up to £250 will not be subject to tax, nor will regular gifts out of excess income.
Lifetime giving can be a good way to tax plan as well as a way of helping out your nearest and dearest, but it is important that people understand the rules so that their 'good deed' does not end up backfiring on them!
The Bank of Mum and Dad risks running up “accidental” inheritance tax (IHT) bills, according to research which found that almost half of parents and grandparents do not understand the tax rules on gifting. Nearly two out of five people are not aware their estate might be liable for inheritance tax on gifts to family members, a poll found. Key Retirement, an equity release provider, said its survey highlighted the “nervousness and confusion” over IHT rules, which resulted in many people failing the make the most of the reliefs to which they were entitled. It said many people did not know they could give £3,000 a year, make gifts to couples getting married or make unlimited gifts out of their income free of inheritance tax.