If you’re handing over regular or lump sums to your children to give them a financial boost, you want to beware of the taxman.
Whether you’re giving a helping hand to get them onto the property ladder, or provide an income boost, there are inheritance tax implications to consider. If you give money at the wrong time or in the wrong way, you risk your children being chased by the taxman at a later date.
Here are the basic rules:
How much money can I gift in lump sums?
You don’t want your children to face an unexpected inheritance tax bill because of money you’ve handed over during your lifetime.
However, each of us has an annual inheritance tax gift allowance. This enables you to give some money away each year to your children without needing to worry about inheritance tax. The annual allowance is £3,000 per person.
Remember this is your personal allowance, so you cannot give each of your children £3,000 each. You would need to split it among your children, if you’re giving money to more than one.
If you haven't used last year’s annual allowance, you can carry this forward. So you could give £6,000 in a year to your child and avoid IHT problems – or up to £12,000 if both parents want to give money and haven’t already used their allowances.
You can also give smaller sums of up to £250 a year to as many people as you like. However, you cannot combine the £250 with another allowance – for example, giving your child the £3,000 annual allowance plus a £250 small gift - as this isn’t allowed.
Read our guide to gifting money to grandchildren at different life stages
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What if I want to give a larger sum?
If you wish to give your child a more sizeable sum over the annual allowance, tax implications can become complicated. If you die within seven years of making that gift, there could potentially be up to a 40% inheritance tax liability payable by your child, depending on the cost of your estate.
However, as long as you live seven years after making the gift – known as a ‘potentially exempt transfer' – then there is no tax to pay.
Planning ahead, using the annual allowances to pay into a trust for your child or children several years in advance of when you may have actually intended to gift them, could be a good option in the long run.
It may be worth talking to a professional adviser who can explain the pros and cons of the different options available to you, if you want to gift a larger amount.
I’ve heard about IHT-free gifts for special occasions – what are these?
You can give extra sums for events like weddings. If your child were to get married, you can give an additional £5,000 towards the wedding. So this is another allowance available to you, on top of the others mentioned.
Grandparents and great grandparents can each give cash or gifts worth £2,500 on the occasion of a wedding, and anyone else can give £1,000.
What if I am giving a small, regular sum?
If you’re still working and paying out of income, you needn’t worry. You’ve already paid tax on your income, so regular payments out of this to your children won’t be subject to additional tax. As far as the taxman is concerned, spend the money as you like as you’ve already paid your liability.
However, remember that regular payments come from your income, not your savings, and rules state they mustn’t significantly impact your standard of living. For example, you don’t face selling your home to fund payments.
If you are making regular payments, make sure you can prove these are from income if the taxman comes knocking.
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