Gifting to the next generation

With higher university tuition fees, soaring housing costs and reduced job security, young people face far more acute financial pressure than their forebears ever have.

As a result, parents and grandparents must increasingly step in to support younger generations at pivotal times in their lives.

Whether it’s a helping hand to get on the property ladder, or providing an income boost, being aware of inheritance tax implications will ensure that nothing negative results from a positive gesture.

It’s important to be aware that any transfer made to another individual from a person’s savings, known as a ‘potentially exempt transfer’ (PET), is subject to the seven-year rule for inheritance tax (IHT) purposes.

That is to say, if the benefactor lives for seven years after making a gift, it does not form part of that person’s estate and is tax-free.

However, if they make an outright gift to an individual and then pass away within seven years, the gift amount may be added back into the estate and considered for IHT purposes, if that estate is worth more than £325,000 at the time of death.

Gifting money to your children or grandchildren regularly and in smaller amounts can be an effective way to minimise IHT.

Being aware will ensure that nothing negative results from a positive gesture.

Your ‘annual exemption’ allows you to gift up to £3,000 per tax year that will be exempt from IHT. If you haven’t gifted any money in the previous tax year, you can carry forward any unused allowance, enabling you to give up to £6,000.

Additionally, your ‘small gifts allowance’ enables you to give up to £250 free from IHT to as many people as you like, each tax year. It’s also possible to gift up to £5,000 tax-free to a child, or £2,500 to a grandchild towards a wedding or civil partnership.

Maintaining records of who you made the gifts to, their value and the date they were made will help to speed up the process of any eventual checks made by HMRC.

Whatever you decide you can afford to give, engaging the support of a solicitor can help to identify how best to gift money, make the most of your tax allowances and ensure children and grandchildren get the best possible start in life.