Gifts to the Grandchildren
10th April 2018
Gifting away your inheritance
We all want to leave a legacy for our partners, our children and out grandchildren and, naturally, we want to see as much of that wealth go to them rather than to the Government.
Giving it away seems like a great option. It is no longer part of the estate plus you get to see those you love enjoy the financial freedom the extra money might give them while you are still alive.
We all love to give gifts! Especially to help out the younger generations at those pivotal times in their life – starting college, buying a first house, getting married or a new arrival. But beware – your generosity may come with strings attached in the shape of a demand from HMRC. It doesn’t mean you can’t help out with nice presents and cash injections but do make sure you understand the rules.
The seven year rule
Inheritance Tax calculations take into account anything you gave away within seven years of your death – it’s called ‘the seven year rule.’ So, if your estate is worth £500,000, you could give away £200,000 to your children to take your own estate below the £325,000 threshold. If, however, you die within seven years, that gift is added back into the estate calculations and inheritance tax will still be payable on the £175,000 of taxable inheritance.
How much you pay on the gifted portion depends on how long ago you gave it. If you die within three years of the gift, you pay the full 40% on the amount liable. After that, tax is paid on a sliding scale from 32% down to 0% at seven years.
Christmas Gifts and other presents
When you make small gifts, such as at Christmas or Birthdays, they are normally exempt from tax (this is HMRC, not Marley and Scrooge!!!). Similarly, you can give up to £5000 as a gift for your child’s wedding, £2500 as a gift for a grandchild or great grandchild’s wedding and £1000 as a gift to the wedding of anyone else.
You can also make other gifts throughout the year up to a value of £3000. This is your annual exemption. It can be carried forward into the next tax year, too, but only for one year. So, if you don’t give any gifts in one year, you can give up to £6000 the next.
For these kinds of gifts, be they cash or items, must come out of ‘normal income.’ In other words, you must be sure that, in your generosity, you don’t leave yourself unable to support yourself or forced to live off the capital of your own estate. If you have to sell shares or your own home to give your gifts, then they are not exempt from inheritance tax under the seven year rule.
Knock-down prices count as gifts
A gift is considered to be anything that has value, including the discounted amount if you sell an asset for less than its worth. Let’s say, for example, that you sold your house to your child for £50,000 when it was really worth £400,000 then the £350,000 difference would count as a gift – and would be included in the calculations of your estate.
If you are making regular gifts to someone – say you are paying tuition fees for your grandchildren who are at university, or to support a friend to start their own business – they may be exempt from inheritance tax if you provide sufficient evidence. This could be done by a letter, stating your intention to your family. There is no time span for the regularity of the gifts, but it is not enough to simply set money aside to give later. The gifts don't have to be to the same person or always be of the same amount, but a pattern must be made by proving a prior intention to make regular gifts.
This statement of intent does not bind you legally to make these gifts - you can discontinue giving if you need to at a later date - and the previous gifts would still be considered for exemption.
You can always make small gifts – of up to £250 per person per year – and there is no limit to the number of people you can give to in this way. Similarly, gifts to charities and to political parties are exempt.
You are also able to help a relative with living costs – typically, giving help to a child under 18 or an elderly relative by, for example, paying the utility bills or other subsistence costs.
One thing to bear in mind about these (and any other) exemptions. They are not given automatically but must be claimed retrospectively by your executors after your death. You can make things much easier for them at what is already a difficult time by keeping clear records of your giving – who to, what for, any evidence of intent and so on.
If you would like to talk to us about inheritance tax rules contact us to arrange a meeting.