IHT: Tax Considerations When Making Gifts To Grandchildren
A great way to shrink your estate ...
Posted by Helen Beaumont on 01/03/2023 @ 8:00AM
Making gifts to grandchildren can be a great way to reduce Inheritance Tax (IHT) and give grandchildren a helping hand, but this can bring with it tax implications so it is essential to understand the details before entering a gifting arrangement ...
Making gifts to grandchildren will reduce the amount of your estate that is subject to IHT!
When you pass away, your estate will be charged to IHT based on the value of the assets that you possess. You will have a nil rate band of £325,000 which can be deducted from your estate and any value above this will be charged to IHT at 40%.
"You could also have access to a transferred nil rate band from a previously deceased spouse!"
This can be a further £325,000 and possibly a residence nil rate band (RNRB) or transferred RNRB if certain conditions are met. Under certain circumstances, these exemptions could amount to £1,000,000, but in many cases, this will be lower.
Making gifts to grandchildren will reduce the amount of your estate that is subject to IHT, however, you must bear in mind that any gifts must be survived by seven years for the exemption to be effective. Otherwise, your nil rate band will still be used for IHT purposes on your death.
After seven years have passed, your nil rate band will 'refresh' and be available in full again, so a regular programme of gifting can significantly reduce your estate chargeable to IHT.
There are some exemptions which do not require a seven-year survival period, and these are:
Small gifts of up to £250 per person per year, such as Christmas or birthday presents
A £3,000 annual exemption (which can be carried forward by one year)
A £2,500 exemption on the marriage of a grandchild
Regular payments from excess income
If you are married, then each of you will have the same exemptions so you can double the value of the gifts.
Regular payments out of income is a very valuable relief and so great care must be taken to make sure you adhere to the rules. Broadly speaking, you can make gifts from your excess income each year as long as this is a normal commitment and does not reduce your standard of living.
You must be careful when gifting assets rather than cash, as this could trigger a capital gain. For example, gifting a property which you have held for a long time could result in a sizable gain at 28% with no proceeds generated with which to pay the tax.
"For many people, their major asset is their main residence!"
You must take the utmost care with any IHT planning regarding the family home. If you give away an asset and continue to benefit from it then this is a 'gift with reservation' and the value of this will still be part of your estate. This will apply to other assets such as holiday homes, cars, or antiques unless you pay a market rent - which of course will be subject to income tax on the person who receives it.
What about cash? Further anti-avoidance rules apply if you give away cash and then benefit from an asset purchased with this cash. This will result in a charge to income tax called a 'pre-owed assets charge'.
Gifting can be a great way to shrink your estate, but should be done with care and advice to ensure that it is effective.
Until next time ...
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more about shrinking the size of your estate for IHT purposes, it may be a great idea to give me a call on 01908 774323 and let's see how I can help you.
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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