How much can clients gift children and grandchildren tax free

More people are “often unknowingly” falling into the inheritance tax net, according to an industry expert.

Following a surge in inheritance tax receipts received by HM Revenue and Customs, Standard Life’s managing director for customer savings and investments, Jenny Holt said it is useful for individuals to know about the number of tax efficient ways they can pass on wealth to their loved ones.

“Sharing wealth with children and grandchildren can provide a wonderful sense of well-being and joy for people aiming to pass on part of their savings to family members, often to help with big expenses such as weddings or education fees, to pay off debt or get on the property ladder,” Holt said.

But even though an individual can gift as much of their money to loved ones as they wish, Holt said it is vital that individuals are aware of the tax implications of intergenerational gifting.

Normally IHT only needs to be paid by an individual if the value of an estate is above the £325,000 threshold, with anything above this amount typically taxed at 40 per cent.

But despite the value of people’s property assets increasing over time, particularly during the pandemic, this main IHT tax free allowance of £325,000 has not increased since 2009.

Over the past year, HMRC collected an extra £729mn in inheritance tax receipts, the largest single-year increase in five years.

Holt said despite it being a complex area, there are a number of tax-efficient ways an individual can support their loved ones and outlined tips for gifting to children or grandchildren tax-free.

Give regularly

An individual can gift up to £3,000 to anyone in a tax year, and gift £250 to as many people as they wish without paying any IHT.

“This can be carried forward one year but if you don’t use it then, you will lose it,” Holt explained.

Open a junior ISA

Holt said: “You can open a Junior ISA for your child or save into one on your grandchild’s behalf”.

Currently, an individual can pay up to £9,000 in total in a tax year into a JISA and that money can be invested, which gives a chance for their savings to increase over time.

The child can access the money when they reach the age of 18 and they will not pay any tax on anything they withdraw or pay capital gains tax on any investment growth either, Holt explained.

“There’s also the option to support their Lifetime ISA – which can be opened by anyone between the age of 18 and 39 and could help them save for a property or boost their pension savings.”

Consider a trust

A trust allows an individual to support their grandchild while they are still around and also offers a number of tax advantages, according to Holt.

“As a trustee, you retain an element of control over the funds, while gifts made to the trust can reduce your estate for IHT.

“Using a discretionary trust gives grandparents the greatest flexibility and control, but the taxation is higher and more complex.”

Larger gifts

If an individual wants to gift larger sums, these will not be counted for IHT purposes if they live for seven years afterwards.

If they do not live for the full seven years, the money they have given will be added to the value of their estate, eating into an individual’s £325,000 threshold.

However, Holt pointed out that an individual is unable to set any part of a tax-free allowance previously inherited from a spouse or partner, or the tax-free allowance (up to £175,000) associated with gifting the family home to children or grandchildren, against these lifetime gifts.

“If you have used all of the available IHT allowances, the gift will be taxed at up to 40 per cent, although the amount of IHT to be paid may be reduced based on how many of the seven years have been passed since the gift was made,” Holt explained.

Think about pension savings

With pension freedoms, individuals aged 55 or over, can access their pension savings and will usually get 25 per cent of the pot tax-free.

Holt said this means they could consider using some of their tax-free lump sum as a gift to their loved ones, but she warned that individuals need to make sure they have enough savings to last them throughout retirement too.

The gifter could also consider nominating a family member as a beneficiary so that their pension plan could be passed on to that family member.

Holt explained that a pension plan is not usually considered part of an individual’s estate, so the beneficiaries will not pay any IHT on it –  although they could pay income tax on anything they chose to withdraw if the gifter were to die after the age of 75.

But as this does not apply to all pension plans, Holt recommended checking this with the provider.

Make use of a children’s bank account

“Bank accounts are practical and easy for family and friends to pay money into and are ideal for smaller amounts of cash.

“However, remember that interest earned in bank accounts is usually low and inflation can eat into any returns, so it’s worth keeping an eye on this,” Holt said.

Unless covered by an exemption, any gifts in this form will also be outside of the individual’s estate in seven years.

Gifting to a grandchild versus gifting to a child

Holt highlighted that there are a number of differences in what can be given to children and grandchildren tax-free:

  • Gifts worth up to £2,500 in a year can be given to a grandchild or great-grandchild (on top of your annual exemption) if they are getting married – but this increases to £5,000 if it’s the gifter’s child.
  • As a grandparent you cannot open a Jisa for your grandchild – that must be done by the child’s parent or legal guardian.
  • If you are a parent making a gift to an unmarried child under 18, and that gift earns interest or pays dividends above £100 in any tax year, all income from the gift will be taxed as if it were the gifters. This is to stop parents trying to get a tax break on their own money by using their children’s allowances. (This rule doesn’t apply to grandparents or to gifts from parents to their children’s Jisas.)

According to Matrix Capital’s founder and financial planner, Robin Melley, it is a good idea for individuals to keep a record of all gifts to ensure a full and accurate disclosure when the time comes for a statement of estate.

Other advisers highlighted the fact that small gift spending can be difficult to keep track of, but Wingate Financial Planning’s director, Alistair Cunningham pointed out that it is very easy for HMRC to discover tax evaders through a third party notice, saying it “will do them routinely where they believe there’s foul play”.



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