Absolutely the right plan for your children, plus you save tax.
Most parents and grandparents will do everything in their power to assist the younger family members financially, from helping to pay the down payment on their first home or simply making a gift.
Poor planning may result in a tax bill depending on how you transfer money down the generations.
As much as 40% of the money you leave behind may be taken by the Government if you leave behind more than £325,000 or typically £650,000 for married couples (nil rate bands).
In addition, homeowners now benefit from the residence nil rate band of £175,000, which is doubled for married couples and is available if you leave your property to your children or grandchildren.
The seven-year rule, though, means that there may be an additional sting.
That’s because IHT calculations roll up all the gifts you made within the last seven years; if that means that tax is due, it may result in the recipients paying the bill.
The good news is that you can make more gifts to your children and grandchildren without paying tax by utilising a range of different tax benefits. Here are some suggestions to get you going:
Create and pay into a pension
Even though retirement may be decades away, contributing to your child’s pension while they are still young has tax advantages. As you pay a net amount of £2,880 into their pension, but this grosses up £3,600 with a boost of tax added to your deposit.
They won’t be able to access their pension fund until they are at least 55.
That gives your gift plenty of time to grow. A one-off payment that results in a gross £3,600, could be worth 10 times that amount (£32,372) when they are able to withdraw monies from their pension (depending on the rate of growth).
Making use of the IHT exemptions and allowances can help you pass on money tax-effectively. When you use these allowances, however, they immediately leave your estate.
The annual exemption comes first. This enables you to make a gift of up to £3,000 every tax year. You may give this to one individual or divide it among several people. You may also carry forward any unused annual exemptions for one tax year only.
If you have not made such a gift before, you can double up and pay ££6,000.
Plus, you are free to make as many gifts of up to £250 per person as you choose per tax year (providing you have not gifted them any other monies in that tax year).
If you have a close family relative who is getting married or entering into a civil partnership you are allowed to contribute up to £5,000 as parents, £2,500 as grandparents, and £1,000 if you are not a parent or grandparent.
If you intend to make recurring payments, you might want to think about the “normal expenditure out of income” exemption. This is frequently forgotten, yet it can enable you to donate a sizeable sum in a tax-efficient manner.
You can gift whatever amount you choose, providing it does not affect your standard of living, meaning you should be able to continue to be able to afford to pay monthly living expenses, from the remainder of your net taxable income.
Consider using trusts
Trusts are a great way to provide for your children.
They provide protection for assets and can be a means of reducing your taxable estate. Trust planning is quite complex, so I suggest you consult a very experienced practitioner.
However, before you do so may I suggest you read “Inheritance Tax Simplified” which has a great deal of information on trusts within it.
I am the joint contributor to this very useful book and would be pleased to send you the latest edition for £12.50 (including postage and packaging).
I trust you found this information useful, before making gifts do take advice.