Sharing wealth with children and grandchildren can provide a wonderful sense of well-being and joy for people aiming to pass on part of their savings to family members, often to help with big expenses such as weddings or education fees, to pay off debt or get on the property ladder. Even though you can gift as much of your money to loved ones as you like, it’s vital to be aware of the tax implications to avoid unexpected tax charges which reduce the full benefit of your gift.
“Inheritance tax (IHT) is paid on your estate, which includes your property, money, possessions and savings, and certain lifetime gifts after you die. Normally IHT only needs to be paid by an individual if the value of an estate is above the £325,000 threshold, with anything above this amount typically taxed at 40%. The latest HMRC figures show that record high IHT receipts were collected in June, as more and more people are falling into the IHT net, often unknowingly.
“There are many tax-efficient ways you can support your loved ones and being well-informed about the options for your family’s circumstances will put you in the best position to make the most of your money, and their future. However, it is a complex area, so it’s well worth seeking financial advice for your situation.”
Jenny Holt outlines tips for gifting to children or grandchildren tax-free:
• Give regularly – “You can gift up to £3,000 to anyone in a tax year, and gift £250 to as many people as you want without paying any inheritance tax (IHT). This can be carried forward one year but if you don’t use it then, you will lose it. So, giving money to your loved ones regularly can be an effective way to minimise the IHT payable on your estate on your death.”
• Pay into their ISA – “You can open a Junior ISA (JISA) for your child or save into one on your grandchild’s behalf. Currently, you can pay up to £9,000 in total in a tax year into a JISA and that money can be invested, which gives a chance for their savings to increase over time. They can access the money when they reach the age of 18 and they won’t pay any tax on anything they withdraw or pay Capital Gains Tax on any investment growth either. There’s also the option to support their Lifetime ISA – which can be opened by anyone between the age of 18 and 39 and could help them save for a property or boost their pension savings."
• Think about the benefits of using a trust – “Using a trust allows you to support your grandchildren while you’re still around, as well as offering a number of tax advantages. As a trustee, you retain an element of control over the funds and how and when they’re paid, while gifts made to the trust can reduce your estate for IHT. Using a discretionary trust gives grandparents the greatest flexibility and control, but the taxation is higher and more complex. You should seek Financial Advice if you are considering using a trust to help you select the right option for your circumstances.”
• Give larger gifts… but be aware of the seven-year rule – “If you want to gift larger sums to individuals, these won’t be counted for IHT purposes if you live for seven years afterwards. If you don’t live for the full seven years, the money you’ve given will be added to the value of your estate, eating into your £325,000 threshold.
Remember, you are unable to set any part of a tax-free allowance previously inherited from a spouse or partner, or the tax-free allowance (up to £175,000) associated with gifting the family home to children or grandchildren, against these lifetime gifts. If you have used all of the available IHT allowances, the gift will be taxed at up to 40%, although the amount of IHT to be paid may be reduced based on how many of the seven years have been passed since the gift was made – this reducing scale is known as taper relief.”
• Consider using your pension savings – “If you’re aged 55 or over (rising to age 57 in 2028), you can access your pension savings and you’ll usually get 25% of your pot tax-free, meaning you could consider using some of your tax-free lump sum as a gift to your loved ones. Bear in mind that your pension savings need to last you throughout your retirement, so make sure you’re not giving away anything that you might need to rely on later. Plus, using your pension pot to help out your loved ones doesn’t necessarily have to be done in your lifetime – especially if taking money out now means you won’t have enough left to provide for yourself.
“You could also think about nominating a family member as a beneficiary so that your pension plan could be passed on to them. Your pension plan isn’t normally included as part of your estate, so your beneficiaries won’t pay any IHT on it, although they could pay income tax on anything they chose to withdraw if you were to die after the age of 75. This doesn’t apply to all pension plans, so do check with your provider if you’re not sure.”
• Make use of a children's bank account – “Bank accounts are practical and easy for family and friends to pay money into and are ideal for smaller amounts of cash. It can be worthwhile giving younger children access to their savings to get them into the habit of managing their own money. However, remember that interest earned in bank accounts is usually low and inflation can eat into any returns, so it’s worth keeping an eye on this. Again, any gifts to them will be outside your estate in seven years (unless they are covered by an exemption).
• Bear in mind the differences between gifting to a grandchild and gifting to a child – “There are a few differences in what you can give to children and grandchildren tax-free, and it’s important to be aware of these so you don’t get caught out. Some key points to note:
You can give gifts worth up to £2,500 in a year to a grandchild or great-grandchild (on top of your annual exemption) if they’re getting married – but this increases to £5,000 if it's your child.
As a grandparent you can't open a JISA for your grandchild – that must be done by the child's parent or legal guardian.
If you’re a parent making a gift to an unmarried child under 18, and that gift earns interest or pays dividends above £100 in any tax year, there are some extra rules. All income from the gift will be taxed as if it were yours. This is to stop parents trying to get a tax break on their own money by using their children’s allowances. This rule doesn’t apply to grandparents or to gifts from parents to their children’s JISAs.”
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