Explained: Getting gifting right and avoiding the tax sting
A third of people have either given a gift of £5,000 or more to their family, or are planning to do so during their lifetime.
According to a survey by Opinium for Hargreaves Lansdown, parents, higher rate taxpayers, property owners, investors and retirees are the demographics most likely to give a gift to family.
How does gifting work?
All individuals have an inheritance tax (IHT) allowance of £325,000 of assets that can be passed on without paying any tax. You get an extra £175,000 of allowance if you leave your main home to a direct descendent.
Under IHT rules, everyone has a gift allowance of £3,000 each year that falls out of your estate for IHT purposes. You can also give small gifts of up to £250, specific gifts for family weddings and unlimited regular gifts from income. You can carry forward unused annual allowances for one tax year.
You can make gifts of any size (known as ‘potentially exempt transfers’) and as long as you live for at least seven years after handing the money over, these fall outside of your estate for IHT tax purposes.
Who is helping out?
The Hargreaves Lansdown research shows that some groups are particularly likely to be making gifts. For some, it’s because their position makes it far more feasible. This is one reason why those on higher incomes (66%) are twice as likely to give gifts. It’s also one reason why almost half (48%) of investors have gifting in their plans.
For parents, the fact they can see life is likely to be tougher for their offspring, means they’re even more keen to give gifts. Almost half (48%) of parents with children in the household have given gifts, or plan to.
The most common reason to give a gift is to help people with a property purchase (12%). Other reasons including paying for university (7%), weddings (7%), IHT considerations (6%) and school fees (5%).
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “What’s the point of having money if we can’t help our loved ones? We want to give them a hand over the big hurdles in life – like buying a property – and to support them when times are tougher. It’s why a third of people have either already given their family members large gifts – or are planning to do so. However, we need to be careful we’re giving them a head start, rather than landing them with a headache.
“One of the key reasons for careful financial planning, and building your own financial resilience is so that you have enough to spare when your loved ones need help. It’s a major reason why millions of people save and invest for the future. Passing wealth across the generations is life-changing for all concerned, and can make a material difference to them for the rest of their lives. However, we need to take care to do it as effectively as possible.”
Six ways to give effectively
A Junior ISA is a good way to gift money to people aged under 18 as the child can’t touch the money until they are 18. Families can save up to £9,000 a year in a Junior ISA for each child, with the returns paid tax-free.
Once children reach the age of 18, it’s possible to super-charge the gift by putting it into their Lifetime ISA – within their £4,000 annual allowances. This will be boosted by the Government 25% bonus, adding £1,000 for every £4,000. It can then either be used towards buying their first property or for retirement.
Junior SIPPS let you put money into a pension for children, and get tax relief on it, despite the fact they’re highly unlikely to be taxpayers at this stage. Any money saved very early in life can have a transformative impact on their pension savings.
Only give what you can afford
Giving gifts during your lifetime can be an incredibly useful way to cut your tax bill, but you need to be confident you’re giving away money you won’t need later. It won’t help your family if you have given away so much that you need to ask for help later.
Consider insurance for potentially exempt transfers
If you give larger gifts, and you don’t live for at least another seven years, they can be brought back into your estate for IHT purposes, and things can get very complicated. It means it’s worth considering a life insurance policy to cover your entire potential tax liability, including these gifts. This should be written in trust, so it falls outside of your estate, and there’s no IHT to pay on it.
Don’t try to beat the system
If you try to give away your home before you die, but continue to live in it or benefit from it in any way, it won’t be counted as having been given away at all. So you’ll have paid for the legalities of swapping ownership without any benefit.