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Gifting Money At Christmas – What Are The IHT Implications?Written on November 8, 2018 by Kirk Rice LLP

Gifting Money At Christmas – What Are The IHT Implications?

Approaching Christmas we are thinking about our family. We recently gave our granddaughter a car to use at university as she is so far from home in Edinburgh. We are going to give her sister £15,000 towards her forthcoming house purchase. We have 5 other grandchildren and want to treat them fairly, but as they are much younger, we are concerned, we may not be alive to help them at their time of need. How can we help them by gifting money and how will inheritance tax affect our plans?

One way of gifting money to grandchildren is to set up a family trust with money from yourselves now. You can retain control during your lifetime and decide who else will have control when you no longer wish to or indeed are unable to. Below we look at the inheritance tax implications.

As an example, you might be able to set up a trust and give it £100,000 to invest for the future needs of your grandchildren. If you are the trustees, you’ll decide when to use the money, but as you say it is some time before your grandchildren will need it, so the money should be managed in investments to ensure it has the best opportunity to grow. You should also consider who else to add as trustees to follow your wishes with you. If your deaths occur at least 7 years after creating the trust, the value given will not be liable to inheritance tax. The trust will be managed by your chosen trustees according to any wishes you have given them. Please be aware that gifts over £325,000 (individually) will be subject to a tax charge on the excess and/or could be subject to periodic and exit tax charges in the future.

If you do not set up a trust, then you‘ll need to ensure your wishes for your grandchildren are relayed to your family through your Will. Your estate will be valued and distributed after inheritance tax is paid. Therefore, less money may be available due to the loss to the tax. A trust will ensure inheritance tax is reduced when your deaths occur more than 7 years after it is set up. £100,000 in a trust currently reduces the inheritance tax by £40,000, which outweighs the arrangement and ongoing investment fees you’ll incur.

The inheritance tax treatment of the gift of the car and the house deposit is similar in that the values will be within your estates for the next 7 years, but there may be an annual allowance reduction available. If you have not used the annual gift allowance in the tax year prior to the gift you can bring it forward. The allowance is currently £3,000 so it might be possible that the value of your car at the date of the gift can be reduced by as much as £6,000. The balance then remains liable to inheritance tax for 7 years. I have assumed that ownership of the car is in your name prior to the gift and its value is at least £6,000.

When you are gifting money to her sister for her house purchase, if you can make sure it is in the tax year following the car gift, you both could use your respective allowances. In addition, your partner may be able to bring forward unused allowance so a total of £9,000 may be ignored for inheritance tax on your deaths within 7 years.

Inheritance tax for gifting money has many rules and there are tried and tested opportunities to manage wealth and assets for the benefit of future generations. Please speak to an experienced adviser, for further thoughts on what actions may be appropriate, taking into account your circumstances and wishes.

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Any reader interested in discussing how gifting money will affect IHT for them can telephone Michael Powell on 01252 960 500 or email info@kirkrice.co.uk.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The FCA does not regulate tax and trust advice.