More and more people are at risk of being landed with an unexpected inheritance tax (IHT) bill because they and their parents were unaware of the implications of what they thought was a gift.
Whether it’s paying for a holiday or a car, or even just gifting a precious family item, inheritance tax would be payable if the person who made the gift dies within seven years of making it. This reminder comes at a time when grown-up children - part of the so-called Generation Rent - have never needed more help from the ‘bank of mum and dad’ to support them with significant purchases.
Figures from Legal & General show that almost 260,000 house and flat purchases in the UK were supported by buyers’ parents, with an average contribution of more than £24,000. A third of people surveyed said they expected help from their parents to buy a house over the next five years.
Our head of Private Client services, Grant Johnson said: “The problems of Generation Rent are well-known. On one hand, high house prices have driven up the deposits that first-time buyers need to save. On the other hand, rising rents have made it harder for would-be homeowners to save anything at all. It’s not surprising that mothers, fathers and other generous relatives are keen to help if they can.
“The economic uncertainty surrounding the Covid recovery only makes the situation more difficult for Generation Rent. But although the Bank of Mum and Dad feels like the right solution all-round, you need to be aware of potential inheritance tax implications.
“It’s not just help with buying a home which carries risk. HMRC says a gift can be anything which has value. That could include a surprise holiday, help with the cost of major house repairs or projects, a present of a car or family treasure.
Grant continued: “Inheritance tax rules are complicated - even the Government has said they should be simpler and fairer. It is possible that the seven year rule could be reduced, but there’s no time-scale on that.
“With the growing number of people relying on relatives to help them climb on to the property ladder, there are more who may fall into this trap. But it is still possible for help to be given, so long as people seek expert advice before they make their gift.”
Tax-free giving guide:
- You can give items or cash with a value of up to £3,000 each tax year (any unused annual exemption can be carried forward one year only).
- Up to £5,000 can be gifted from each parent for a child’s marriage or civil partnership (or £2,500 for a grandchild, and £1,000 for anyone else).
- Regular gifting made as part of ‘normal expenditure out of income’, including birthday or Christmas presents is allowed.
- Combining exemptions for the same person is allowable, meaning a couple whose child was marrying could each give them at least £8,000 in ‘exempted gifts’ (a wedding gift of £5,000, a £3,000 gift, any unused exemption from the previous year, and a top-up birthday present). Other family members could also chip in.
- Beware any gifts do not push your estate above the inheritance tax threshold (£325,000 in the current tax year).
If you would like to discuss your particular situation and plans with one of our team, we’d be happy to help.
An extract of this article appeared in the Daily Mail on 14 December 2020.
