Cash Gift to Children

capinpugwash

I have recently received some tax free cash as part of my pension on early retirement.

I want to gift £3000 to each of my 4 children, ages 16,19.21 and 29 straight away and another £3000 each at the start of the next tax year. I understand that they will be putting this money into mini Isa's to receive tax free interest.

I believe that this money will be potentially exempt as far as IHT is concerned and as I am 57 I hope to live for the next 7/8 years and it wiil then become fully exempt. Is this correct?

Also can anyone confirm that the interest received will indeed be tax free and not subject to tax as part of the gifts to children tax charge if interest exceeds £100 per annum.

I am slightly confused as to what constitutes a child in IR eyes! ??? The youngest is still at college but the others are independent, at last!

MJSW

I believe that this money will be potentially exempt as far as IHT is concerned and as I am 57  I hope to live for the next 7/8 years and it wiil then become fully exempt. Is this correct?

Yes, if you live more than 7 years, it will fall out of your estate. You may be able to get some of it completely exempt anyway due to your annual gift allowance, even if you don't live 7 years. The first £3000 of gifts made in each tax year are ignored for Inheritance Tax. If you didn't use your allowance in the previous year, you can also carry it forward for one year only. So if you haven't previously made gifts, you would be able to give £6000 this tax year completely free of Inheritance Tax. If you are married, your spouse could also give £6000 to the kids this tax year, making £12,000 between you. So you could give the immediate £3000 gifts without any Inheritance Tax consequences at all.

There is another exemption for small gifts of up to £250 per person each tax year. With careful planning, you could use this to increase the Inheritance Tax free amount a little more.

For example, parent 1 donates £3000 each to kids 1 and 2, and £250 each to kids 3 and 4. Parent 2 donates £250 each to kids 1 and 2, and £3000 each to kids 3 and 4. As you only want to give £3000 each now, and another £3000 in the next tax year, you could wait until 5 April to make the £250 gifts if you wanted to. On 6 April, you could do something similar. Parent 1 gives £2500 each to kids 1 and 2, and £250 each to kids 3 and 4. Parent 2 donates £250 each to kids 1 and 2, and £2500 each to kids 3 and 4.

Each child receives £3000+£250+£2500+£250=£6000. All gifts in the first year would fall within allowances. In the second year, each parent would be treated as making potentially exempt transfers of £2500+£2500, less the exemption for the new tax year of £3000 leaves only £2000.

So in essence, only £2000 would be added back to the estate of the donor should they die within 7 years, compared to actual gifts made of £12,000. I'm sure I've made that sound far more complicated than it actually is!

I am slightly confused as to what constitutes a child in IR eyes! ??? The youngest is still at college but the others are independent, at last!

They will count as a child until they reach 18 (or get married!). This may become a problem in the case of your 16 year old, as a decent ISA with £3000 in it should generate over £100 of income. If it does, then the income would be treated as yours for tax purposes. The £100 limit applies per parent though, so you could calculate a figure which would produce less than £100 per annum (say £2000, although it will depend on the rate you are getting) and each make a gift of that sum. Then give the rest on the 18th birthday to bring them up to the £6000 which the other 3 have had .

capinpugwash

Yes, if you live more than 7 years, it will fall out of your estate. You may be able to get some of it completely exempt anyway due to your annual gift allowance, even if you don't live 7 years. The first £3000 of gifts made in each tax year are ignored for Inheritance Tax. If you didn't use your allowance in the previous year, you can also carry it forward for one year only. So if you haven't previously made gifts, you would be able to give £6000 this tax year completely free of Inheritance Tax. If you are married, your spouse could also give £6000 to the kids this tax year, making £12,000 between you. So you could give the immediate £3000 gifts without any Inheritance Tax consequences at all.

There is another exemption for small gifts of up to £250 per person each tax year. With careful planning, you could use this to increase the Inheritance Tax free amount a little more.

For example, parent 1 donates £3000 each to kids 1 and 2, and £250 each to kids 3 and 4. Parent 2 donates £250 each to kids 1 and 2, and £3000 each to kids 3 and 4. As you only want to give £3000 each now, and another £3000 in the next tax year, you could wait until 5 April to make the £250 gifts if you wanted to. On 6 April, you could do something similar. Parent 1 gives £2500 each to kids 1 and 2, and £250 each to kids 3 and 4. Parent 2 donates £250 each to kids 1 and 2, and £2500 each to kids 3 and 4.

Each child receives £3000+£250+£2500+£250=£6000. All gifts in the first year would fall within allowances. In the second year, each parent would be treated as making potentially exempt transfers of £2500+£2500, less the exemption for the new tax year of £3000 leaves only £2000.

So in essence, only £2000 would be added back to the estate of the donor should they die within 7 years, compared to actual gifts made of £12,000. I'm sure I've made that sound far more complicated than it actually is!  :o

They will count as a child until they reach 18 (or get married!). This may become a problem in the case of your 16 year old, as a decent ISA with £3000 in it should generate over £100 of income. If it does, then the income would be treated as yours for tax purposes. The £100 limit applies per parent though, so you could calculate a figure which would produce less than £100 per annum (say £2000, although it will depend on the rate you are getting) and each make a gift of that sum. Then give the rest on the 18th birthday to bring them up to the £6000 which the other 3 have had .