A common approach for many is to leave gifts to loved ones in their Will. However, this might mean that the funds do not come at a time when they are most needed by your loved ones. It may therefore be beneficial to consider gifting money to your children and grandchildren in your lifetime.
Gifting money to family can be simple and effective; but you should consider the types of gifts and the tax implications for each.
How to gift to your children / grandchildren?
If you gift money to your children or grandchildren there are no capital gains implications, but this does lead to Inheritance tax (IHT) implications, which are often missed. This is because gifts could decrease your nil rate band (the amount up to which an estate has no IHT to pay) or even form part of the chargeable estate for IHT.
However, there are some options which are exempt from IHT implications which families may want to consider, and these include:
Using an Annual Exemption (AE)
Each individual receives an Annual exemption of £3,000 per tax year and if the previous year amount was unused this can be carried forward. This gives any one person the availability to gift £6,000 without any IHT implications. This £6,000 can be of a capital nature. Please note that if investments are sold to fund this gift there may be Capital Gains Tax implications to consider.
Making Small Gifts
Up to £250 per person can be gifted within a tax year to as many people as you would like, but the exemption is per person. This means that you cannot gift your annual exemption alongside your small gift to the same person.
Using the Wedding Allowance
Individual can gift certain amounts free from IHT for a marriage or civil partnership, as per the below limits:
- Each Parent (including Step-Parents) can gift up to £5,000.
- Grandparents or Great Grandparents can gift up to £2,500.
- Any other person can gift up to £1,000.
You can boost these amounts by using this allowance alongside your Annual Exemption (see above), which can be split between a number of recipients. This can be boosted further with gifts out of surplus income (see below).
Making regular financial gifts from surplus income
If you have a surplus income in the year you can gift this away as a fully exempt gift with no time clock or restrictions on the amount. Income can include, earnings, pensions, investment income etc. but cannot include capital i.e. sale proceeds from a house. For the exemption to apply the gifts must made out of your income, form part of your ‘normal expenditure’ paid out on a regular basis and the gift should not have any impact on your own standard of living. When used alongside the IHT £3,000 annual exemption, this can be a very useful method to move assets out of a donor’s estate over a period of time.
Keep records of your gifts
When making gifts good record keeping is vital. Evidence of commitment is highly recommended, so for example set up a standing order. Also, records of the surplus income and gifts out of this must be kept.
Consider the 7 year rule
When making gifts it is important to consider the 7 year rule. No tax is due on any gifts you give if you live for 7 years after giving them – unless the gift is part of a trust. This is known as the 7 year rule. If you die within 7 years of giving a gift and there’s Inheritance Tax to pay on it, the amount of tax due after your death depends on when you gave it.
Gifts given in the 3 years before your death are taxed at 40%. Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’. Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold.
With regards to regular gifts out of surplus income, if they follow the criteria outlined above, on your death, they will be covered by the ‘normal expenditure out of income’ exemption. This means that these gifts will be exempt from Inheritance Tax and neither the recipients nor the estate will pay tax on these gifts.
Also consider your Capital Gains implications
As well as Inheritance Tax, it is important to watch out for both Capital Gains Tax (CGT) and Income Tax, when gifting.
A cash gift does not necessarily attract a tax liability at the outset. However, if you are selling existing assets to raise the required cash, or indeed gifting an asset, you may incur a CGT liability.
Your CGT allowance, the amount of gains exempt from tax within any year, has recently been halved to £6,000 (2023/24) and is due to half again to £3,000 (2024/25), making a tax liability more likely than was previously the case.
More options to help your children / grandchildren in the longer term
For those thinking about gifting money to their children to invest for the longer term, it is important to consider the tax efficiency of the method you choose.
Whilst children have their own tax-free personal allowance, savings allowance and CGT allowance just like an adult, they are not necessarily liable for the tax that may become payable once assets have been gifted to them.
Here are some options and their tax implications for consideration.
Savings Accounts
Having their own savings account makes children more money aware and can encourage them to develop good savings habits as grown-ups. So, until your children are old enough to stash away some pocket money or birthday cash gifts themselves, you can save a little for them every month. Set up a standing order to build up a lump sum for them over a few years. You may wish to review whether an instant access account or one which attracts higher interest is preferred.
It is important to note that if a parent invests money into a savings account for their child and that savings account generates interest in excess of £100 per annum, this will be taxed on the parent, not the child. This does not apply to gifts from grandparents.
Junior ISA (JISA)
A Junior Cash ISA is similar to a bank or building society savings account although the money is locked in and cannot be withdrawn until age 18. But Junior Cash ISAs come with one big advantage – your child doesn’t have to pay tax on the interest they earn on their savings, and you don’t have to either.
Anyone can invest into a JISA on behalf of a child, and each child has a JISA allowance of £9,000 per annum. The monies are managed by the parent/guardian and cannot be accessed by the child, until they turn 18.
Lifetime ISA (LISA)
A LISA can be an attractive solution for adult children under the age of 40. You can contribute up to £4,000 per year until the child is 50 years old, and the government will add a bonus of 25% to each contribution. For example, a contribution of £4,000 will receive a government bonus of £1,000, making a total contribution of £5,000 per year.
A LISA can only be withdrawn tax free, if it is used to purchase a first home (worth up to £450,000) or accessed after the age of 60. If monies are withdrawn for any other reason, a 25% withdrawal charge will be deducted.
Trusts
Simply put, a Trust is legal arrangement where one or more ‘Trustees’ are made legally responsible for holding assets. The assets – such as land, money, buildings, shares or even antiques – are placed in Trust for the benefit of one or more ‘beneficiaries’, typically a child, spouse, relative or charity institution.
There are several types of UK family Trusts and each type of Trust may be taxed differently, so we advise speaking to us in more detail about your options and the tax considerations.
Need to know more?
As always, we recommend speaking to our tax team to discuss tax efficient gifting based on your individual circumstances. If you would like to discuss, please do get in touch with us.
Jim provides personal taxation planning, advisory and compliance services.