Gifting cash for a property purchase for children is a common way parents support their offspring in securing a home. However, they then can find themselves ensnared in various tax traps that demand careful consideration ...
Parents should also be aware of the 'seven-year rule' when gifting cash!
One particularly complex area is that of the Pre-Owned Asset Tax (POAT), a crucial aspect that could impact parents who give cash intending to facilitate their children's property acquisitions.
When parents decide to gift significant amounts of cash, they often operate under the assumption that these funds will be used exclusively for their children's benefit.
However, if parents subsequently reside in that property as they become less independent, HMRC may deem it a 'pre-owned asset,' triggering potential tax implications. This could result in double taxation: once on the gift itself and again on any benefits enjoyed by the parents from that gift!
The rules surrounding POAT stipulate that if the donor retains an interest in the gifted asset, they may be liable for tax on any benefits they derive from that property. Therefore, if parents choose to reside in a property purchased with gifted funds, they need to be acutely aware of the ramifications. The intention behind the gift doesn't exempt them from this tax.
It's crucial for parents to understand the annual exemption limit when considering gifts. Gifts up to £3,000 can be given each tax year without incurring any immediate tax implications.
However, if their gifting exceeds this limit and falls outside the exemption criteria, it may incur Inheritance Tax (IHT) issues down the line. Consequently, proper planning is vital, and parents are advised to keep records of their gifts and seek professional guidance to ensure compliance with tax regulations.
"Parents should also be aware of the 'seven-year rule' when gifting cash!"
If the parent survives for seven years after making the gift, it generally won't count towards their estate for IHT purposes. However, if they pass away within this time frame, the value of the gift might contribute to the overall value of their estate, leading to potential IHT liabilities that could have otherwise been avoided.
As with all financial matters, transparency with children regarding the nature of the gift is essential. Open discussions can help manage expectations and alleviate future surprises related to potential tax implications.
Should the parents ever reconsider their living arrangements or contribute to their child's financial assets in other forms, having these conversations upfront can prevent misunderstandings later.
"Gifting cash for a property purchase is fraught with the potential for tax traps!"
Parents must educate themselves about the implications of their financial choices and consider professional advice to navigate these complexities effectively. Ultimately, informed gifting strategies can help families achieve their goals.
And you can all safeguard your financial futures.
Until next time ...
HELEN BEAUMONT
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 gifting cash to your children to purchase property, do 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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