Gifting and Inheritance Tax
April 2010
It’s sometimes hard to believe that children are just as liable to pay Inheritance Tax (IHT) as adults.
When it comes to financial gifts unless they are ‘substantial’, most will be covered by HM Revenue & Customs' allowances that exempt certain gifts from IHT.
Gifts to children - unlike gifts to spouses or civil partners - are not exempt from IHT unless the person making the gift lives for seven years after making them. The following are useful exemptions when it comes to giving children financial presents.
Small gifts
At the lower end of gifting you can make as many outright gifts of up to £250 to each individual in any tax year, as long as each of their individual gifts from you does not exceed £250.
The seven-year rule
You can give any amount of money to your children or other individual as long as it is given more than seven years before you die. The rules around gifting substantial amounts during your lifetime can get complicated and you should take legal and financial advice to ensure that you do this in the most tax efficient way possible – you won’t want the recipient of your kindness left with a tax bill later on.
Annual exemption
In addition to the other gift exemptions £3,000 can be given each tax year, as well as £3,000 from the previous tax year if you haven’t taken advantage of this before. So effectively you or someone else could give your child up to £6,000 in one year. If you or a relative can afford to make regular gifts out of income, these are also potentially exempt from IHT.
Wedding and civil partnership gifts
Later on you could give wedding gifts of up to £5,000 to each of your children (including step-children and adopted children). Grandparents can give wedding gifts up to £2,500 for each grandchild or the person that your grandchild is marrying and anyone can give a wedding gift of up to £1,000.
You could make gifts under more than one of these headings to the same person and they will be free from IHT. For example if one of your children was to go to university, you could give them £3,000 plus a regular amount every month out of income and these ‘gifts’ would be exempt from IHT. It’s a good opportunity to help children with regular contributions towards their education, and perhaps later mortgage or other monthly costs - although it is worth noting these regular gifts are paid out of your net income.
