Grandparents and parents often wish to provide financial assistance to their families through cash gifts. However, it is important to be cautious as such gifts can potentially turn into a financial burden.
While offering monetary support during one’s lifetime may appear as a strategy to avoid Inheritance Tax, it could inadvertently lead to imposing a substantial financial obligation on loved ones.
Inheritance Tax (IHT) is applicable on the assets left behind upon one’s demise. Each individual is entitled to an allowance of £325,000 on their estate before IHT becomes applicable.
Given the current property prices, many individuals exceed the threshold despite not having significant cash reserves. The allowance doubles for married couples, effectively raising the threshold to £650,000. Moreover, if a home is bequeathed to children or grandchildren, the allowance can further increase to £500,000 (or £1 million for a married couple).
The IHT rate stands at 40%, meaning any amount surpassing the allowance is taxed at this rate before beneficiaries can access the estate’s funds or assets.
To circumvent the seven-year rule on gifting cash and assets subject to IHT, individuals can make annual gifts of up to £3,000 to any recipient. This amount can be carried forward to £6,000 if unused in the previous year. Additionally, gifts such as birthday and Christmas presents from regular income are exempt from IHT, as long as they don’t compromise the giver’s standard of living.
Moreover, specific occasions like a child’s wedding allow for increased gifting limits, such as £5,000 for a child and £2,500 for a grandchild. These amounts can be combined with annual allowances for tax-efficient giving.
Supporting grandchildren through regular financial contributions, sourced from monthly income like pensions, is another way to assist without triggering IHT implications. However, individuals must ensure such payments do not affect their own living standards and are not derived from savings.
Caution should be exercised when contemplating gifting property or assets to heirs before death, as it could have implications on long-term care costs and Capital Gains Tax. It’s crucial to consider the potential consequences and seek professional advice before making significant financial decisions.
By exploring alternative ways to provide support, such as covering educational expenses or assisting with homeownership-related costs, grandparents can aid their grandchildren while avoiding potential tax burdens in the future.
