According to recent research, ‘The Bank of Mum and Dad’ risk incurring accidental inheritance tax (IHT) bills due to not fully understanding the rules on gifting money to family members and friends.

Nervousness and confusion were cited as key factors in not fully understanding the rules – and although legislation will gradually increase the IHT threshold for couples wishing to pass on their homes to children to £1m – in most cases, there is a £3,000 per year cap on gifting in your lifetime, unless careful planning is implemented.

In the UK, the majority of people are determined to help their children and grandchildren with a financial step up in life at some stage – whether that be assisting with university debts, contributing to their wedding celebrations, or providing a much-needed helping hand with climbing on the housing ladder – but here at The Financial Planning Group we find that, with the right foresight, much of that generosity can be achieved without unduly exposing your family to unwelcome IHT bills further down the line.

Stay within the rules

  • The inheritance tax rules on gifts are complex. Even though gifts made less than seven years before death are potentially liable to 40 per cent inheritance tax, there are numerous reliefs that might reduce or eliminate the overall bill.
  • Anyone is allowed to give away a total of £3,000 each tax year without it counting towards IHT. It is also possible to bring forward last year’s exemption, if unused, making it possible to give away £6,000 without any IHT potentially being due.
  • Gifts that do not count for IHT purposes include wedding gifts of £5,000 for a child, or up to £2,500 for a grandchild or £1,000 to anyone else. They also include any number of small gifts up to £250 to separate people. If someone draws on their income to make regular gifts that do not affect their standard of living, those gifts will be exempt from IHT.
  • Payments to children, including paying off their student loans or tuition fees, are normally exempt from IHT while they are in full-time education. Payments to help maintain ex-spouses or elderly relatives are also exempt.
  • Gifts that do not fall into any of these exclusions will also be exempt from IHT if the person making the gift lives for at least seven years. If not, the tax will depend on whether the gifts were worth more or less than the £325,000 IHT threshold. If they are worth less than the threshold, they are added to the estate, which picks up the bill.
  • But if the value of the gifts made in the seven years before death exceeds the £325,000 threshold, the person who received the gift is responsible for paying the tax. The tax rate ranges from 40 per cent for gifts made within three years of death to as little as 8 per cent for gifts made six years before the death.

If you have any questions concerning Inheritance Tax Planning and to ensure your family are fully protected, please call Tim Norris on 0800 731 7614 and we would be delighted to arrange a meeting at our offices in the heart of Teddington.



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