Intergenerational gifting is arguably at an all-time high and while gifting is, in some circumstances, a sensible step to take, wealth should be released in a tax efficient manner, bearing in mind individual circumstances.
In simple terms, gifts made in the seven years prior to death are considered as part of the Inheritance Tax (IHT) calculation. The extent of any relevant gifts may mean that more IHT requires to be paid, or, in some cases, where very large gifts have been made, the recipient may face liability for paying any IHT arising directly from the gift.
Therefore, it is important to make effective use of the various available IHT exemptions. Which include:
- Annual exemption – currently up to £3,000 may be gifted per tax year (subject to a right to carry forward an unused allowance for one year only).
- Small gifts exemption – up to £250 per individual per tax year is exempt and there is no limit to the number of recipients of such gifts.
- Gifts in consideration of marriage – Each parent is entitled to gift their child £5,000 on the occasion of or shortly before their marriage. Grandparents may gift up to £2,500 and others may gift up to £1,000 tax free.
- Gifts to charities – such gifts are exempt provided they pass to charities registered in the UK and/or certain overseas charities recognised by HMRC.
Normal expenditure out of income is another exemption worthy of fuller consideration. Broadly, any gifts made out of excess income and as part of a regular pattern of gifting may benefit from immediate exemption to IHT, but there are strict requirements, particularly in respect of record keeping. Following the Autumn Budget, it is anticipated that pensioners may wish to start drawing on pensions (given that unspent pensions will from April 2027 be subject to Inheritance Tax), with a view to realising an income for onward regular gifting.
If assets are to be passed to a young adult, there is no ‘one size fits all’ solution. You should consider the following before making any large gifts:
- Should funds be invested, following professional financial planning advice, to protect them from erosion by inflation
- Should funds be invested in their pension? If so, they may wish to engage a pensions advisor.
- If you are gifting funds or redirecting to a young beneficiary, should a trust be set up?
- Do any asset protection considerations apply?
If longer term asset protection is a consideration, an outright gift of a large amount to your child may not be appropriate. For example, if funds are to be applied towards a purchase of a home, with a partner or spouse, planning may be required to protect these funds. These might include loaning funds to your child, or settling property into a trust. For those with substantial wealth and asset protection concerns, a Family Investment Company (FIC) may also be an attractive option.
The advantage of using a trust structure or a FIC is that it can allow the capital value within the trust/company to grow outwith your own personal estate (provided you survive for seven years following the gift). However, these options are not suitable in all cases, and it is important to evaluate each approach, taking into account your own succession planning considerations.
These considerations may appear daunting at first, but Shepherd and Wedderburn’s experienced Private Wealth and Tax team can provide you and your family with the peace of mind that your respective financial positions are protected in the best manner possible.