A reader asks about tax and money gifts to children
As I’m not badly off, I help my 30-year-old daughter, who’s self-employed, by giving her £180 a month towards family expenses.
I would now like to give her an additional £5,000 by way of a lump sum to help make up a shortfall in the deposit for a house that she and her partner are buying together.
Would she have to pay tax on this money – and indeed, would I? In one year I would be giving her 12 payments of £180 plus one lump sum of £5,000, which comes to a total of £7,160.
Is it right that you can give your children as much as you like, as long as you are not deliberately making yourself poor to avoid paying for care, should you ever need to go into a home?
Read our guide to the costs of giving your house to your children.
Annie Shaw replies about tax and money gifts to children
You’re getting confused between tax and the care fees rules, so let’s look at these separately.
First there’s the tax issue. There’s no income tax for your daughter to pay, as both the regular payments and the lump sum are a gift, and not part of her earnings.
Since you have paid or will pay tax on your own income, as far as the taxman is concerned you can spend your money as you wish – mending your roof, buying a new car, putting a bet on a horse or, indeed, giving a cheque to your daughter to help her out.
There is no capital transfer tax (CTT) in the UK – a tax on simply handing money from one individual to another, where no goods or services are involved, at the time you make the payment.
What about inheritance tax on gifts to children?
We used to have CTT, but it was abolished in 1988, when it was replaced with inheritance tax (IHT), and this is something you might need to be mindful of.
When you die, you have an allowance – the so-called “nil rate band” – on which no tax is payable.
It currently stands at £325,000, and if you are or were married and your spouse predeceases you, any unused portion of his or her allowance can be transferred to you, giving you a total allowance at current rates of up to £650,000.
If all your assets added together are less than these thresholds, you needn’t worry about inheritance tax at all, no matter how much you give your daughter now.
If your assets will amount to more than the nil rate band when you die – say you are lucky enough to live in a £1 million house – then as long as you live seven years after making the gift, the money that you are giving your daughter – known in the jargon as a “potentially exempt transfer” – drops out of your estate and there is no tax to pay.
If you were tragically to die within seven years of making the gift, then you still might not have to pay inheritance tax on your daughter’s money, because you could make use of various annual allowances.
Read our simple guide to tax on gifts
What are the tax implications if I am giving away a small amount of money?
You can give away £3,000 in any one year completely free of inheritance tax. In the first year, or if you miss a year, you can give away £6,000 because you can use the previous year’s allowance if you didn’t use it at the time – but only for one year.
You can make small gifts of up to £250 to as many people as you like – scores if you want – but you mustn’t give any individual more than one of these gifts amounting to more than £250 or combine the £250 with another allowance (for instance, giving someone your £3,000 annual allowance plus a £250 small gift) as this is not permitted.
You can also give regular gifts out of income. If you are still working, or have regular pension or saving income, which it seems you do, and you are giving your daughter a payment every month and have done this for some time, then there would be no doubt that you fulfil this criterion.
What counts as a regular gift?
The rules say that the payments must be regular rather than sporadic – although they don’t necessarily have to be monthly – and that the payments must not be from capital – i.e. savings – or cause a deterioration in your standard of living.
Presumably you have bank statements showing your regular payments; but anyone contemplating using this allowance is advised to keep detailed records in case of queries by the taxman at a later date.
So, unless you are using these allowances on gifts to other members of your family as well as your daughter, it looks like you are in the clear on inheritance tax.
What are the tax implications if it's a cash gift for a special occasion?
Incidentally, although this may not apply to you, as your daughter might not be contemplating getting married right now, it might be useful to know if ever she does in future that, as a parent, you can give your daughter an additional £5,000 free of inheritance tax on the occasion of her wedding.
So, if she were planning to get married at the same time as she gets a new home, that would be yet another allowance available to you. 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.
If I give money away will it be seen as avoiding care home fees?
Quite separate from the problem of tax is the issue of care fees and the “deliberate deprivation” rules. These state that you are not allowed to purposely offload assets in order to reduce your capital and property so that they fall below the level at which the local authority must contribute to the cost of your care.
If you do this, the authority will assess you as if you still owned the assets.
Unfortunately there is no time bar rule, or a date before which “deliberate deprivation” can be ruled out. Nor are there fixed “allowances” that you can give away without attracting scrutiny.
What allowances are not subject to inheritance tax?
While a gift falls out of the inheritance tax net after seven years, and there are annual allowances that are not subject to IHT, there is no such timescale or list of allowances that applies to care fees, and the local authority can go back as far as it likes when looking at your affairs in order to make an assessment.
For deliberate deprivation to take place, however, there has to be at least some prospect of you needing care and an intention of impoverishing yourself to avoid paying for it.
A perfectly fit person making a modest gift to his daughter is highly unlikely to be accused of deliberate deprivation at a later date, in the way that an 80-year-old who has just been diagnosed with Alzheimer’s might if they started writing big cheques to relatives the week that they booked into long-term care.
Read our article about avoiding care costs
Will a cash gift affect my child's benefit entitlement?
Two areas that you should be certain about before going ahead with your gift are your daughter’s benefit entitlement, if she claims anything.
If she gets any type of benefit or grant, it is worth checking that your regular gifts, and indeed the lump sum, don’t take her over an income or capital threshold. If they do, and she is not declaring something that she should be, that would be fraud.
If I loan money to my children are there any tax implications?
Finally, I am assuming that your donation towards the deposit on your daughter’s house is a genuine gift, and there is no suggestion that she might ever have to pay it back.
Any payment that you want back, even if there is no date set for when the money must be returned or interest charged on it, is technically a loan and should be declared to your daughter’s mortgage lender as, once again, not doing so would be fraud. If the money is a genuine gift then there is no problem at all.
Read our guide to inheritance tax...