Many people look to give a financial gift to their children and grandchildren to contribute towards significant life events such as funding private school fees, university education, paying for a wedding or helping to buy their first home. It can bring joy, pride, and peace of mind to see your money making a difference to the lives of your loved ones.
However, before you consider making a financial gift to give a loved one, there are many important factors to consider.
How do financial gifts affect inheritance tax?
Making financial gifts in your lifetime can potentially help with your inheritance tax (IHT) planning if carried out correctly. In the tax year 2022/23, HMRC raised a huge £7.1bn in IHT receipts and this is likely to increase again this tax year. With this in mind, it may be a good time to review your current estate plan and look at ways to mitigate the impact of IHT through gifting.
Before making a financial gift it’s important to consider the seven-year rule. Under current regulations, making a gift to an individual, providing you live for seven years after making the gift, will not form part of your estate for IHT purposes regardless of the amount of the gift.
Gifts into a trust fall under different rules and may be subject to IHT if the amount gifted exceeds the nil-rate band allowance, currently £325,000.
What is taper relief?
If you happen to pass away within those seven years of giving a gift, the amount of IHT on your estate will depend on when you gave the gift. Gifts given within three years before your death will be taxed at a maximum of 40%. Gifts given within three to seven years before your death are taxed on a sliding scale known as ‘taper relief’.
Taper relief will only apply if the total value of the gifts made within the seven years before you die is over the £325,000 inheritance tax-free threshold.
Allowances
Not all gifts are subject to the seven-year rule and the following types of exempt gifts will be immediately outside your estate for IHT purposes:
- The annual exemption – it is possible to give away £3,000 per year either to one person or split across several individuals.
- The small gifts exemption – small gifts of up to £250 can be made to as many people as you want during any one tax year, provided you haven’t used any other allowances on them.
- Normal expenditure out of income – when regular payments are made to an individual out of your surplus income after expenditure, they should be exempt from inheritance tax.
- The marriage exemption – You can also give a tax-free gift to someone who is getting married or starting a civil partnership. The limits are £5,000 for a child, £2,500 to a grandchild or great-grandchild and £1,000 to any other person. You can combine a wedding gift allowance with any other allowance if you are giving gifts to the same person, with the exception of the small gift allowance. For example, you can give your grandchild a wedding gift of £2,500 as well as £3,000 using your annual exemption in the same tax year.
Important conversations
If you are considering giving a financial gift to members of your family, it is imperative that you first check your affordability with a financial planner. They can work with you to determine what you need to live on and how much you can afford to give.
As well as having conversations with expert advisers, it’s also important to inform your beneficiaries of your gifting plan. It can help them to make their own financial plans as soon as possible and with greater clarity. It can also help to avoid any confusion or fall out following the gift, for example if your beneficiaries were expecting to receive a larger amount. If communication is unclear, you run the risk of potentially negatively impacting your personal relationships to your beneficiaries. Again, a financial planner can help to facilitate these difficult family conversations and advise your children or grandchildren on their own estate upon receiving the gift.
Giving an early inheritance – summary
To be able to financially support children and grandchildren is a goal for many, and with a financial gift it is possible to achieve this goal within your lifetime. With the right affordability, understanding of IHT rules and clear communication of your intentions, you and your family could enjoy the benefits of a financial gift.
If you are seeking guidance on giving a financial gift, mitigating the impact of inheritance tax or bespoke estate planning, please do get in touch with our team.
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Important Note
The information contained within this document is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.
This article is distributed for educational purposes only and should not be considered financial advice.
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The opinions stated in this document are those of the author and do not necessarily represent the view of Progeny and should not be relied upon to make a financial decision.
Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
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Tax treatment depends upon individual circumstances and is based on current UK tax legislation, that is subject to change at any time.
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