As the season of goodwill approaches, it seems that Christmas is not the only occasion that parents may wish to gift money to their children. As their youngsters struggle to get on the property ladder, it is more often the case that deposits for houses and flats are funded by the “Bank of Mum and Dad”. Additionally, the funding for university fees, weddings and other large purchases can also fall on the parents.
Whilst the generosity of mum and dad can help their offspring out of a tight spot, careful consideration is required to ensure that funds are appropriately gifted in order to avoid unnecessary Inheritance Tax falling on those that they are trying to help. Appropriate use of the available allowances can ensure that the legacy left to the children does not include an Inheritance Tax bill.
Here are the basic rules for the tax year 2015/16 but remember, these allowances can change each tax year.
Annual Allowance: –
Each parent (or individual) has an annual allowance of £3,000 per tax year that can be used to gift monies – this allowance will be increased to £6,000 if no gifts were made in the previous tax year.
Smaller Sums: –
Additionally, each parent (or individual) can give away smaller sums of £250 per annum to as many people as required, but this allowance cannot combine with the £3,000 annual allowance.
Special Occassions: –
Parents can give an additional £5,000 each towards their child’s wedding; however, if the wedding does not go ahead, the gift will not be exempt from Inheritance Tax.
Regular Payments: –
Parents can lend their son or daughter a financial hand by considering paying regular monthly amounts directly to them. Regular payments are excluded from Inheritance Tax as long as they are paid from regular income (not savings) and do not affect the donor’s lifestyle (for example, the parent has not sold their home to make these payments).
Let’s not forget that based on the tax year 2015/16, each individual has a Nil Rate band of £325,000 so there is no Inheritance Tax liability on this amount (£650,000 per married couple). From 2017 a £175,000 allowance (each) will be phased in to allow individuals to leave their home to children and grandchildren tax free. The combination of these two allowances will, by 2020, enable a married couple to leave an Estate of £1 million without paying Inheritance Tax.
Talk to a Deep Blue Adviser for more information.