In the old days, passing on an inheritance to your kids was simple: you died, and they got the money.
Planning around Inheritance Tax (IHT), however, has changed all that.
With a standard rate of 40% on everything you leave over £325,000 – and marriage separation often leading to complications around who’s going to leave what to whom – more and more parents are choosing to give their kids cash and assets BEFORE they die.
In fact, new research from Direct Life Insurance shows nearly seven million parents have already given their children money early to try and reduce their tax bill.
And on top of that, the same number again say they plan to give their kids money early in the future.
In total, almost £230 billion has been paid out early, at an average of nearly £33,000.
So, if you want to join them, how do you do it?
Rules around gifting
The first thing to bear in mind is that any gift has to be given “without reservation”. In other words, with no strings attached.
So, you need to be sure you’re not going to need that money back in the future.
The second big thing to remember is that you need to be fairly sure you’ve got plenty of gas left in the tank.
You need to be confident you’ve got another ten years left, because if you die within seven years of giving a gift, it will then be liable for IHT and your kids will have to pick up the bill. A healthy lifestyle suddenly takes on a whole new significance.
So how much can you give? Well, let’s deal with the basic ways first.
Everyone has a £3,000 Gift Allowance every year, which means you can give away assets or cash up to that amount IHT- free.
You can carry over any leftover allowance from one tax year to the next, up to a maximum of £6,000 (although you have to use up all your allowance in that tax year, so you can’t keep building it up).
This is a great way to give your kids money gradually, through relatively small, regular payments.
Weddings and support payments
You also have the option to give up to £5,000 tax-free to each of your children to help pay for their wedding, and make regular payments to help them financially if they’re under 18 or in full-time education.
Finally, you can make regular payments into your child’s savings account from what’s known as your surplus income without being liable for tax. In other words, if you can cover your outgoings from the money you’ve got coming in and you’re able to put a little aside for them, you can.
Potentially Exempt Transfer
Now for the big one.
If you want to go bigger and hand over a massive chunk of cash or an asset like property, you can do so by using what’s known as a Potentially Exempt Transfer (PET).
You can hand over as much as you like up to the IHT threshold of £325,000 without being liable for any tax, under one condition. Yep, you guessed it, you have to live for at least another seven years. Die within that timeframe and it will be subject to IHT.
There’s one more important thing to remember.
Whether you choose to give regularly and often through the Gift Allowance or give a substantial one-off through a Potentially Exempt Transfer, it’s absolutely vital you keep thorough records of everything.
Make sure you note down what you gave, who you gave it to, when you gave it to them and how much it was worth.
Fail to do so and one of your nearest and dearest are likely to end up with a bill from the tax man when the end comes.
Whatever you do, make sure you’re fit and well if you decide to start giving your kids their inheritance early. And maybe give that bucket list bungee jump or skydive a wide berth.