December 7, 2021

Uber Turco News

Breaking News, Sports, Entertainment

Why people gifting money to their children or grandchildren are being warned about unexpected tax bills

Why people gifting money to their children or grandchildren are being warned about unexpected tax bills
The pandemic has accelerated the plans of many savers keen to pass money to their children or grandchildren. But they are being warned to make sure they do not end up giving some of those funds to the taxman instead.

Tim Walford-Fitzgerald, of the accountant HW Fisher, said the indiscriminate nature of Covid-19 had made many consider their own mortality. He said: “While the total numbers may never be known, anecdotal evidence certainly points to more wills and lasting powers of attorney being drafted than previously.”

In a survey by the financial adviser Killik & Co, more than a quarter of UK adults who responded said that they planned to increase the financial support they gave to family members. A fifth said they had started passing down wealth and helping children or grandchildren earlier than planned. Nearly four in 10 said they wanted to help their loved ones now rather than leaving money in a will. Two in 10 said they were anxious to help because they had seen their children or grandchildren struggle emotionally and financially during the pandemic.

The most popular form of financial support was cash, favoured by 40 per cent. Twenty per cent said they planned to help by paying for a property deposit, while 19 per cent intended to help with wedding costs or university fees. Other forms of support included helping to pay an existing mortgage, while 12 per cent wanted to put cash into a junior Isa.

But gifting money can come with unexpected tax bills. According to the poll, nearly half of respondents had no idea of the rules on inheritance tax, levied at 40 per cent, and its limits. Shaun Robson, the head of wealth planning at Killik & Co, said it was important that parents and grandparents realised the implications of giving large sums of money to relatives, and essential that they secured their own financial futures first. So what can relatives give? Here is i’s guide for gifters:

    <figure class="inews__shortcode-readmore">
    <div class="inews__shortcode-readmore__image">
    <img src="https://i.inews.co.uk/content/uploads/2021/11/PRI_210567915-155x155.jpg" height="84" width="84" alt="Read More - Featured Image">
    </div>
    <div class="inews__shortcode-readmore__text">
    <h4>Read More</h4>
    <a href="https://inews.co.uk/inews-lifestyle/money/saving-and-banking/inflation-why-does-it-matter-how-to-protect-your-money-1304808">Why does inflation matter? How you can protect your money from the rising cost of living</a>
    </div>
    </figure>

Passing on property

Colin Dyer, a client director at abrdn, said the residence nil-rate band (RNRB) which came into effect in 2017 meant it was easier for people to pass on their family home without incurring inheritance tax (IHT). If someone dies and their estate is worth more than the basic IHT threshold of £325,000, their estate may qualify for the RNRB.

This additional property threshold currently stands at £175,000, so in 2020-21 your IHT threshold will be £500,000 – or in other words, £325,000 plus £175,000. But beware, the RNRB is limited to one residential property.

Cash gifts

Whether it is money, personal goods, property or stocks and shares, IHT may have to be paid after your death on any gifts you have given to friends and family – if you did so in the seven years before your death.

Everyone has an annual exemption, which means you can give away £3,000 of gifts each tax year without them being subject to IHT. That might be £3,000 to one person, or you might opt to split £3,000 between multiple people. You can also give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.

Large amounts of money may fall under the “gifts with reservation” exemption, which means that relatives may be liable to pay capital gains tax, which can fall outside the seven-year exemption.

Gifting to children

The allowance for junior Individual Savings Accounts (Jisas) is now a very generous £9,000 a year per child, says Simon Goldthorpe, at Beaufort Financial. If you contribute regularly to a Jisa it is classed as “excess income”. “But as long as it is not materially affecting your lifestyle, it is therefore inheritance tax-exempt,” explains Mr Goldthorpe.

Gifting a pension

“This is the ultimate in responsible inheritance. Setting up a pension for your child can be tax-efficient and will ensure that they cannot access it until pension freedom age. That is currently 55 but set to rise to 57 in 2028,” says Mr Goldthorpe.

The allowance for a Junior Self-Invested Personal Pension (Junior Sipp) is more restricted at £3,600 a year, but like the Jisa it is exempt from inheritance tax as long as you can prove that it does not affect your day-to-day finances.

“The ultimate benefit of a pension for your child is that they cannot
access it until retirement,” adds Mr Goldthorpe.

“Plus, with so many potential years of gains and compounding to be had, the sum that you leave in their account could become extremely valuable over time – performance permitting.”

First person: ‘Cash savings do not pay that much’

Andrew Soames, 51, from Bishop’s Stortford, Hertfordshire

“Last year I started putting money into Premium Bonds for our daughters. Our 12-year-old has a child trust fund, into which we put her birthday money and Christmas money, and we have a Jisa for our eight-year-old.

“My wife has only gone back to work full-time in the past few months. She took time off during the pandemic to support our girls. Now she’s back working we plan to try to pay off our mortgage quicker and then we can save more towards our girls’ futures.

“We do worry that they will struggle to get on the property ladder. Our parents want to leave them something, but they might need their money for nursing care. My wife did set up a pension for the girls but we’ve put that on hold until we have paid off our mortgage.

“Premium Bonds aren’t ideal but cash savings aren’t paying that much, so it’s a split between putting money where it’s tied up until they are 18, or where there’s a small chance they might win a prize.”


According to a poll conducted by financial adviser Killik & Co, nearly half of respondents had no idea of the rules on inheritance tax