Grant Johnson, Head of Private Client at Lindsays explains why parents should be cautious if they plan to use their own savings to help children struggling financially because of the cost of living crisis. In our article which is now published on several media outlets, he warns that their generosity could come with a tax sting.
Cash support from the so-called Bank of Mum and Dad comes with potential pitfalls that many do not realise. Lawyers in our Private Client team say they are already working with more families every year to avoid costly tax consequences should unforeseen circumstances strike.
The Bank of Mum and Dad has traditionally been linked with parents stepping in to ease the strain on children trying to get on the property ladder. However, with household bills for utilities, food and other costs on the rise, Grant says those stepping in to help with not just housing but other money issues would be well advised to make sure they do not fall into a tax trap.
Grant said: “The natural instinct of a parent is to help wherever they can. Sometimes that means they want - or need - to give their children money. There’s the chance that this could become even more common as bills for all of us rise.
“Looking at the property market alone, it may even be that more first-time buyers will be reliant on their families for support because they can save even less due to the cost of daily life going up.
“Sadly some gifts come at a cost which all too many people do not realise, perhaps most commonly when trying to help someone buy a home of their own. If or when you open the Bank of Mum and Dad, you need to be aware of potential inheritance tax implications.”
Inheritance tax would be payable if the person who made the gift dies within seven years of making it.
The energy price cap - which benefited about 60% of homes - was lifted by the UK Government at the beginning of this month (April). That means bills are likely to rise by as much as half. On top of that, figures published in January showed that UK food costs had risen by 4.8% in the 12 months up to December 2021. There are fears they will rise further as production costs increase. Petrol and diesel prices have also risen sharply since the start of the war in Ukraine. The cost of filling a family car with petrol was a third higher in March than it was a year ago, with a diesel car costing 40% more.
Property prices continue to rise. The average price of a property in Scotland was £181,000 in February - up 11.7% compared to 12 months earlier. That’s faster than the UK average of 10.9%.
Grant added: “It’s a commonly misheld view that it’s just help with buying a home which carries risk when it comes to tax. HMRC says a gift can be anything which has value. That could include help with the cost of major house repairs or projects, a present of a car or family treasure.
“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 timescale 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 - even before financial pressures stepped up a gear. 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).
This article appeared in The Courier on Monday 9 May 2022.
