Gifts for loved ones - beware the pitfalls
Q: I’ve been reading stories in the press about older parents being forced to help their grown-up cash-strapped children with everything from a deposit on a flat and school fees to just paying the grocery bills. I thought I was the only one doing this, and while in some ways it’s good to know I’m not alone, it’s rather depressing that people who have saved all their lives to enjoy a comfortable retirement are now having to shell out for the next generation, which seems not to be able to make ends meet.
I was wondering if you have any tips about how best to hand over cash without falling foul of the taxman or any other hazards. Is it right that I can only give away £3,000 a year? While only one of my sons needs substantial help, I feel it’s only fair to give the same to my second son, who actually has his own flat and a well-paid job. Do I need to make payments differently if one is a higher taxpayer and the other isn’t?
A: You can give as much money as you like to whomever you like – family, friends – anyone. The law doesn’t tax you on making financial gifts of any size, nor does the recipient pay tax on the money he or she receives.
For yourself, the two main things you need to look out for are the inheritance tax rules, if your estate is likely to be liable for IHT, and the care fees assessment rules. As for the recipients, you should also consider any impact a gift would have on benefits, if your older son is entitled to them. The younger one might have to pay higher rate tax on any interest he receives if he banks your gift in a savings account rather than spending it, assuming he’s a higher rate taxpayer.
You can find details of the IHT rules about gifts here. Briefly, you can give away £3,000 a year without incurring any tax liability if you were to die soon after making the gift (twice that if you didn’t give away £3,000 in the previous year), and you can give certain gifts on the marriage of children, grandchildren and friends. You can give any number of small gifts up to £250, but you can’t give two small gifts of £250 to the same person or combine different categories of gift – e.g. give someone £3,250. Most other one-off gifts will become what is known as “potentially exempt transfers”, meaning that if you live for seven years after making the gift there is no tax to pay, but if you don’t live that long there may be tax to pay on a sliding scale.
The most practical way you could help your sons and not fall foul of IHT, assuming you want to give them more than the £3,000 annual IHT-free allowance, is to give them what is known as “regular gifts out of income”. These regular gifts must come out of your day-to-day budget; they can’t come out of capital and they mustn’t reduce your standard of living. If you were to give your sons – say – £150 a month each out of your current account, that should do the trick. Giving each a lump sum of £1,500 wouldn’t.
While your sons would not have to pay any tax on receipt of the gifts, if they put the money into a savings account they would have to pay tax at their marginal rate on any interest or dividends they received from the cash. If your elder son is a higher rate taxpayer this could affect him.
Watch out for how gifts impact on benefits. You say one of you sons is struggling financially. Regular gifts or a lump sum payment could affect his entitlement to benefits, if he is getting any. The same caveat applies to bequests made in a will, which can potentially leave beneficiaries no better off if they lose their benefits.
In addition to IHT, the other pitfall of giving gifts to family members is falling foul of the care fees rules. These rules say that you are not allowed to “deliberately deprive yourself” of assets in order to avoid paying your own care fees. The rules are complicated and motivation plays a large part. While it seems to me that helping a family member in financial distress could not be interpreted as “deliberate deprivation”, particularly if you are in good health, if you are likely to need care in the immediate future, and are on the financial border of needing local authority assistance with fees, you might like to check with the authorities how they would interpret gifts to relatives. Certainly a large cash gift made to a relative shortly before entering care might be regarded with suspicion.
If you don’t want to hand over bundles of banknotes – or their electronic equivalent – you could help your children financially in other ways. You could pick up certain bills, such as school fees, if they have their own children, or treat them to holidays. (School fee payments could be set up as regular gifts out of income.) You could make payments into their pension fund, if they’ve had to stop contributions because of a shortage of cash. You could help them to buy a property, either by giving them cash for a deposit or by becoming a joint owner with them and – if your circumstances are suitable – sharing the mortgage costs. You should be aware that in this case, if you became a joint owner with your offspring, you could be liable to capital gains tax on your share when the property was sold, because it would not be your principal private residence, which qualifies for CGT relief.
It might also be possible for you to take on the role of mortgage guarantor. Some lenders offer guarantee loans, which allow a family member to underwrite the shortfall between what the lender would normally lend to an individual, with reference to the value of the property and the borrower’s income, and the amount the individual needs to borrow to secure the property. This is ideal in a case where a borrower is – say – paid irregularly in bonuses or for contract work which don’t meet the bank’s normal lending criteria, but do in fact mean that he or she can afford the loan as long as the bonuses continue to be paid. As long as your son keeps on making payments you don’t have to hand over any money, but if your son were to default you would be liable for the entire loan and not just the portion that was needed to make up the shortfall.
If you don’t want to guarantee a mortgage loan you might be able to guarantee the rent on a flat, allowing your son to live somewhere a bit more pleasant, if his current home is not satisfactory. Parental guarantees are quite common for student lets, but a guarantee could allow those of working age to get a flat where the landlord would otherwise be seeking a letter from an employer or proof of income.
While everyone wants to help their children, you shouldn’t put your future security at risk. Remember, your children are young, and although life may seem hard for them they still have time to “catch up” and get on the property ladder and make a future for themselves. I will echo the words of the debt charity the Consumer Credit Counselling Service, which urges older people to think about their own future before bailing out their children and grandchildren, particularly if they are considering remortgaging their own home to do so. It cautioned: “There are a lot of costs associated with getting older, and it is crucial that these are factored in.”
If you are worried about inheritance tax or care fees, you should talk to a specialist financial adviser. The last thing you want to do is enter into a well-intended arrangement that leaves you or the person you are trying to help worse off than if you hadn’t bothered.
* Read Annie Shaw's money articles every month in Saga Magazine.