Article by Faye Watts
If you’re lucky enough to have money or property to leave to your children, Faye Watts of www.fuseaccountants.co.uk looks at how to do it, and shares a word of warning…
Let’s start by saying that there’s nothing wrong with wanting to give money to your children in the most tax efficient way possible. You’ve already paid tax on that money when you earned it, so doing your best to save it from the tax man is not unethical, greedy or immoral. This isn’t tax evasion, its legitimate inheritance tax planning.
So, let’s look at the key ways that you might like to help your children out both while you’re still alive, and when you’re gone.
If you give your child (or anyone) a gift of cash out of your capital and you live for another 7 years following that gift, that money remains inheritance tax free. However, if you die before then, the gift may be clawed back into your estate and subject to inheritance tax. The recipient doesn’t have to declare the gift on their own tax return, but it will need to be included in the inheritance workings of the estate. It is therefore wise to make such gifts by bank transfer and have an official record of it for the future so that you have a paper trail, so that all information is available to your executors.
If you have sufficient income, you can give small gifts out of your income provided you have sufficient income to live on, (and a record should be kept of this) and these gifts would be exempted for inheritance tax purposes, and remain outside of your estate. What is considered as a small gift may change but the current rules are shown here; https://www.gov.uk/inheritance-tax/gifts
If you’re wondering whether to buy your child part or all of a property, it is simpler to give them some cash outright so that they can do this, rather than buy it and transfer it to them as a gift later, which could bring about additional legal and other tax charges.
Teenagers and students can earn up to £1k as a hobby without having to declare it as earned income. So, you can pay your child or grandchild money in this way for doing some tasks for you. You could even bring your child into the family business and pay them a sensible wage for doing a role in the business, and they can use that to pay their own way at university.
There are multiple ways you can invest for your children and there are many options available. However, the most tax-efficient could be to set up a child ISA or children’s pension scheme to save for them this way from young, tax free. Premium Bonds also remain tax-free.
Where it gets complicated
Do remember that you have no control over the money you give away, and if your child spends it on drink/drugs/travelling against your will then there’s nothing you can do, unless you set up a trust. These can be costly but may be worth it if there is a large sum of money and/or your child is not mature enough to deal with the responsibility.
A more worrying issue is if you decide to give your child a share in your house, while you still live there. Most of the time, this is fine, but I have come across situations where the child has married someone who does not get on with the parent. When living there the parent is made to feel like a guest in their own home, or worse. So, I tend to advise on this with caution.
Inheritance Tax bill on property
You may like to avoid the unfortunate situation where your child or children inherit your property, which is not in the best condition or location. They don’t want to live in it, can’t sell it, and yet have to deal with a large inheritance tax bill. Inheritance tax is payable on estates that are worth over £325,000. If you are concerned this may be the case then one thing you can do is take out life insurance in trust to your beneficiary(ies) to cover any tax that could become due.
Do be aware that if you’re giving money to grandchildren over 18, they will be liable for any tax on earnings relating to the gift, such as investment income following the gift of an investment fund, or bank interest on a cash sum, or on the dividends from any gifted shares.
Keep funds/accounts invested by grandparents separate from parental investments, as parents will be taxed on income earned from their children’s funds if over £100 if set up by the parent, up until they are 18. This does not apply to grandparents. This is to stop parents putting funds in their children’s name to avoid paying tax personally!
Inheritance tax investment products
Speak to your independent financial adviser as there are various investment opportunities that could help you shelter some of your inheritance tax exposure particularly if you are sitting on cash you do not need. This may be preferable to you giving your kids the cash right now!
Don’t get caught
If you do give away an asset and still retain the benefit of using it, which could be an expensive car or a holiday home it may still be considered as part of your estate, so it is essential to take good pre-emptive advice early on.
Faye is no ordinary accountant and tax advisor. Her background with creative industries and seven years as a freelancer in the fitness industry, followed by running her own accountancy practice since 2008 means that she has a real life understanding of the pressures of running and growing a business. As well as her work in tax consultancy and business planning, Faye sits on the advisory boards of a number of companies, including Funny Women and Sister Snog.
http://fayewatts.com and www.fuseccountants.co.uk