There is a lot of hearsay about how much money you can pass to your children without causing an inheritance tax headache, but in reality it is easier than you may be led to believe.
First, you need to check if there’s even an issue with Inheritance Tax. Each person can have an estate of up to £325,000 when they die before inheritance tax is an issue. This is increased to £500,000 if that person owns their own home and has children to inherit; this means that for a couple with a joint estate they can be worth up to £1 million before inheritance tax will become payable.
If you are lucky enough to have an issue with inheritance tax, it makes sense to pass some of your estate value to the next generation and limit the tax they pay when you are gone. This is not without risk since half that money may be lost in a divorce settlement, but there is certainly a good argument for passing on small sums when you can.
Normal expenditure is not considered a gift, so if you buy dinner or entry to a venue this is unlikely to be considered anything other than a parent acting as they normally would.
Gifts from normal expenditure are also exempt from any inheritance tax consequences, so if you are lucky to have more income than you need, you can give the rest away of you wish. There are a few things to look out for:
- Withdrawals from savings, investment bonds & ISAs are typically capital and not income, so you cannot live on this money and claim other income is excess. If in doubt you can check with us.
- Your gifts should not affect your standard of living.
- Don’t forget you may have future expenses such as care costs that might be higher than expected.
Gifts in the Public Interest: so you can give money to the National Trust, English Heritage or a Political Party and these are exempted from inheritance; these might include a family membership for your beneficiaries.
Gifts on Marriage: certain mounts can be gifted to children and grandchildren when they marry.
Small Gifts: up to £250 per receiving person can be given without consequence.
Large(?) Gifts: up to £3,000 per gifting person can be given to beneficiaries without consequence, with a one off quota for the previous year available. Beware using both small and large gifts to the same people.
So in a family with married children and numerous grandchildren, there is quite a bit of money that can be squirreled away for, spent on, and passed over to your beneficiaries.
Above these options, gifts can be made but inheritance tax may be payable if you live for another 7 years (14 years in some extreme circumstances). For such gifts, advice should be sought.
Record keeping is a good idea as HMRC IHT forms ask about the history of gifting from a deceased’s estate. More detail on the gifting rules is here: https://www.gov.uk/inheritance-tax/gifts