Yes, you can gift money to your children as a way to reduce inheritance tax (IHT), but there are important rules and thresholds to consider. The UK’s inheritance tax system allows for tax-free gifts under certain conditions, but if these gifts are made within seven years of your death, they may still be subject to IHT.
A study found that around 50% of UK parents plan to pass on their wealth to their children, and many are concerned about the potential inheritance tax liabilities their heirs may face.
What is the Seven-Year Rule For Gifting Money For Inheritance?
One of the most significant rules for gifting money to reduce IHT is the seven-year rule. Gifts made more than seven years before your death are generally exempt from inheritance tax, while gifts made within seven years may incur tax, with the rate depending on the timing of the gift and the amount.
For instance, if you pass away within three years of making the gift, it will be taxed at the full 40% rate, while taper relief reduces the tax burden the longer the gift is made before death. For this reason, many put their house in their children’s name to avoid IHT.
What Are Annual Exemptions and Other Allowances For Inheritance Tax?
In addition to the seven-year rule, there are several exemptions and allowances that allow you to gift money to your children without incurring inheritance tax. The annual exemption allows you to give up to £3,000 per year without it counting towards your estate for IHT purposes.
If you don’t use the full £3,000 exemption in a given year, you can carry it forward to the next tax year, but only for one year.
What Are The Potential Risks of Gifting Money To Avoid Inheritance Tax?
While gifting money can reduce the value of your estate, it is essential to consider the potential risks. If the gift is made within seven years of your death, it will be included in your estate for IHT purposes, and the recipient may face a significant tax bill.
It is also important to remember that large gifts could affect your financial security in later life, especially if you need care or support.
How Does Gifting to Spouses and Charities Work?
It is worth noting that certain gifts, such as those to spouses, civil partners or charities, are exempt from inheritance tax, regardless of the seven-year rule.
This means that if you wish to reduce the value of your estate and avoid IHT, you can make unlimited gifts to your spouse or civil partner, or donate to charity without any tax implications.
Can You Gift Money to Children for Specific Purposes?
Yes, another option is to gift money to your children for specific purposes, such as buying a house. While this type of gift may be exempt from inheritance tax, it’s important to document the gift clearly to ensure it doesn’t create complications in the future.
For example, if the money is intended as a loan rather than a gift, the terms of the loan should be formalised to avoid misunderstandings or disputes later.
How Much Can You Gift Without Paying Inheritance Tax?
In addition to the annual exemption, there are other ways to gift money without incurring inheritance tax. For example, if you are helping with your children’s education or medical expenses, those gifts can be exempt from inheritance tax.
Additionally, gifts made out of surplus income (i.e., money that you don’t need to maintain your lifestyle) may be exempt from IHT, provided they are made regularly and can be demonstrated to be part of your usual spending pattern.
What is The Impact of Gifting on Your Estate Plan?
Gifting money to your children is just one part of a comprehensive estate plan. While it can reduce the potential inheritance tax liability, it should be carefully planned to avoid unintended consequences.
For example, if you give away too much of your estate too quickly, you may find yourself without sufficient assets to cover long-term care or living expenses.
Should You Seek Professional Advice?
It is always a sensible idea to seek professional advice when making large gifts or planning your estate.
An experienced solicitor or tax adviser can help you navigate the complexities of inheritance tax law and ensure that your gifts are structured in the most tax-efficient way. This can help you maximise the value passed on to your children while minimising any tax liabilities.
Gifting money to your children can be an effective way to reduce inheritance tax, but it is essential to understand the rules. By considering the seven-year rule, the annual exemption and other allowances, you can reduce your estate’s value and avoid paying inheritance tax.
Careful planning and professional advice are key to making sure your gifts are tax-efficient and secure.
