Annie Shaw answers your money questions
Q: I am a widow in my mid-eighties, with three children in their fifties and four grandchildren in their early twenties. One is engaged to be married. I understand I can give my children and grandchildren money on an annual basis tax-free, and also on marriage. I would appreciate further information on how much money I can give them annually.
A: You can give them absolutely as much as you like whenever you like. There are no restrictions on how much you can give anyone.
There are two issues that might affect how much you want to give and what the effects of giving might be. These are the inheritance tax rules and the long-term care rules.
First, you need to consider if your estate is likely to be liable for IHT. It won’t be if, when you die, you leave assets worth less than £325,000. This allowance rises to £650,000 if you have been married or in a civil partnership and your late spouse did not use some or all of his IHT allowance because he had few assets or left most or all of them to you.
If your estate will not be liable for IHT, then however much you give and when you give it will have no effect on your estate so you need have no further concerns.
Even if your estate is likely to be liable for IHT you can still give as much as you like tax-free as long as you survive seven years after making the gift.
If you do not survive for seven years then you need to observer the following rules to ensure that any gifts you make are exempt of tax.
You can give £3,000 away tax-free each year, or £6,000 in the first year that you make a gift, or in subsequent years if you miss a year. The annual allowance can be carried forward, but for one year only.
You can also give as many small gifts as you like up to the value of £250 each in any one tax year. However, you can’t give more than £250 to a person and then try to claim that the first £250 is a small gift. If you give an amount greater than £250 the exemption is lost altogether and your gift will then become subject to the “seven year rule” above.
Neither can you add two categories together in order to give a larger sum to a single person. You can’t, for instance, give someone £3,250 and claim that you are using your annual £3,000 allowance and a £250 small gifts allowance at the same time. The gifts would have to go to different people for each sum to qualify for IHT exemption.
You can however give gifts on the occasion of a marriage or civil partnership ceremony. Parents can each give cash or gifts worth £5,000; grandparents and great-grandparents can give gifts worth £2,500; and anyone else can give gifts worth £1,000.
Since one of your grandchildren is getting married you could therefore give them £2,500 with no IHT implications. You need to make the gift, or promise to make it, before the ceremony. If you leave making the gift until after the marriage or the ceremony is called off, you don’t get the exemption.
Finally, you can make regular gifts of any size out of your after-tax income, as long as they don’t deplete your capital. These gifts will only qualify if you have enough income left after making them to maintain your normal lifestyle.
You could use this exemption to help with paying a mortgage, school fees or just household bills. This exemption is often used to fund some type of insurance policy. However, where there is no official contract of this nature it might be a good idea to draw up some sort of formal agreement, preferably with professional advice, to make the regular payments so that, in the event of your death prior to a regular pattern being established, HMRC can easily recognise that a commitment to pay regularly is in place.
The second issue you need to take not of when making gifts to family members is long-term care. The rules say that you are not allowed to “deliberately deprive” yourself of assets.
If you make gifts to relatives or friends and then seek local authority assistance with care fees, the authority can treat you as having “deliberately deprived” yourself of funds and treat you as if you still had the money, or put a charge on the assets you have given away.
For instance, if you gave a relative money to buy a house, the authority could put a charge on the house and recover the money when the house was eventually sold. Small gifts of cash such as those given to family and friends at Christmas or on birthdays are unlikely to attract attention, but large transfers of cash could result in inquiries by the local authority if you were to need assistance with paying long-term care fees at any time in the future (there is no “time limit” after which such disposals of assets are discounted).
Once again, you should seek professional advice about how to avoid transgressing any rules.
* Read Annie Shaw's money articles every month in Saga Magazine.