Gifts to adult children

ratsmoneystuff

I’m confused by the rules on gifting/making payments to children/grandchildren and wonder if anyone could shed some light?  I’ve read what I can from the HMRC website, but I’m out of my depth when it comes to understanding it!

I have read that, (above and beyond the £3000 worth of gits each person can make each tax year), “gifts that come out of excess income don’t count (from the point of view of being treated as partly still your money and added back to your estate if you die within 7 years), so long as you are able to maintain your standard of living after making a gift”.

The reason I ask is that my husband and I would like to make regular payments of £200 per month to each of our three adult children who each have very young children for whom they will need to start paying childcare fees in a year or so and are all currently struggling a bit.  So the payments are intended to help each of them out during the next five years with their general costs of living.

Having recently turned 66 (husband is 64) I’m now receiving 2 additional pensions which, given that we don’t lead an expensive lifestyle, means we already have more than enough pension income (plus interest from savings/investment accounts etc.) to live on comfortably to be able to give away £600 a month of this ‘new’ additional income without it having any impact on our income/spending habits/standard of living. I should point out that we do (and always have) pool all our income and expenditure through a joint account.

Is anyone who understands the rules able to tell me whether this is something we could do without incurring the wrath of the taxman???  Anything we should be wary of given that the payments would come from our joint account?   If it helps to know, our home is worth around £450,000 and between us we have around £450,000 in savings and investments. Given that if one of us died everything would go to the other half, would our estate even come under Inheritance tax??

Any thoughts/ideas/ guidance would be much appreciated – as you can tell I’m fairly clueless! Thanks!

El_Torro

I am certainly no expert, but if you're giving away £7,200 per year between the two of you (i.e. £3,600 each) I don't see a big issue with this. It is only just above the £3,000 annual amount.

One important thing to consider is that if you give money away and subsequently need to go into a care home then the council will not look kindly on this, they may even consider the money you have given away as part of your estate. Look up "deprivation of assets" for more info on this. Seeing as you have £450k in savings / investments and a home worth £450k I don't see this being a big issue though. This rule is more in place to stop you (for example) giving your property to your children and then expecting the government / tax payer to pay for your care home. 

So based on what you plan to do I think you're fine. Even if the £7,200 you give away each year does subsequently become part of your estate for inheritance tax purposes is that even a big issue? It just means a bit more inheritance tax is paid when your kids inherit. 

EDITED: Got my sums wrong, thought you had 2 kids, not 3

Flugelhorn

we are planning to do this -  give my 2 over £1000 a month between them, I keep a chart with income and expenditure and a (note that these gifts are from excess income) showing that there is still an excess out of income at the end of each month - was advised to do it like this at a retirement seminar 

Linton

Yes you can make unlimited gifts out of income in addition to the £3K allowance without any tax being imposed at any time.  It would be very helpful to your executors to leave full information for them to prove to HMRC that the gifts were really from income and did not deplete savings or decrease your standard of living.  Otherwise there could be a need for the executors to search through years of bank statements to work out what was going on.

 There is carry over from one year to the next - last year's income doesnt become savings for perhaps a year or two .  I dont think the number of years is explicitly stated but 1 is fine.

It is usually stated here that as a married couple with a suitably expensive house you can be worth £1M without any inheritance tax, but thatr's not my field.  Other people should be able to give you the details.

Albermarle

 You can give as much as you like, to who you like, and HMRC are not interested.

The issues/rules about gifts, are only relevant if you are likely to pay inheritance tax on your estate, and you die within 7 years of making the gifts.
Even then there is nothing stopping you giving large gifts, just that if you die within 7 years, the gifts will still be counted as part of your estate for IHT calculation purposes. So nothing actually lost.

The only real issue about making large gifts, is that the recipient is then the owner, and if you ever wanted it back they could say no.
Also as mentioned above if the gift meant that you had to rely on the council for care, then they would not be happy with that .

DullGreyGuy

Thinking purely from a tax (not benefits or care) perspective you are free to gift as much as you want to whoever you want. 

The "issue" only comes if you die within 7 years of making the gift then it will effectively be considered part of your estate still (on a tapered basis after 3 years). If you didnt gift it you'd just leave it there then no one is worse off by this as it'd attract the same IHT being part of your estate - if you spent it on beer and hookers instead then the tax bill will be bigger but the inheritance will also be bigger net of tax. 

Jeremy535897

The basic rule is that any outright gift by an individual donor to another individual can only be chargeable to inheritance tax if the cumulative amount of gifts in the seven years before death not covered by exemptions by the donor exceed the nil rate band (£500,000 in your circumstances). That is clearly not the case for you.

Dealing with your circumstances, suppose one of you dies three years after giving £5,000 a year in total to your family members. The worst case scenario is that the deceased's nil rate band is reduced by £15,000 (3 years at £5,000) less £9,000 (3 years of annual exemptions) = £6,000, so the survivor "inherits" a nil rate band of £494,000 rather than £500,000. If the survivor dies 2 years later, having made 5 years of gifts of £5,000 a year, then the survivor's nil rate band is £500,000 less £(5,000-3,000) x 5 = £490,000, plus the inherited nil rate band of £494,000. All that has happened is that the nil rate bands are reduced from £1 million to £984,000. There is no tapering in these circumstances, as the gifts are well within the nil rate bands.

This assumes that you keep a home to live in worth at least £350,000, although there are detailed rules preserving the residential nil rate band if you sell or downsize.

If you keep sufficient records to show that the amounts given are within the normal expenditure out of income exemption, then you won't even lose the modest amounts of nil rate band mentioned above. Some brief details are given in the link below, including the form on which to keep records:
https://www.hcrlaw.com/blog/normal-expenditure-out-of-income-exemption-how-does-it-work/

Much more detail here:
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14231

ratsmoneystuff

Thank you so very much El-Torro, Flugelhorn, Linton, Albermarle, DullGreyGuy and Jeremy636897, firstly for taking the time to respond, but also for making such an effort to explain in a way that is so clear for me to understand!   I really do sincerely appreciate you all helping to attempt to clear the fog.  Heartfelt thanks!

dales1

Yes, I keep records on a draft form IHT 403 each year, to show that my gifts are out of income.

Otherwise it might be hard for my executor to reconstruct this form.

The IHT exemption for 'gifts out of income' will eventually save my estate a useful chunk of IHT.

Because as the years pass by, the annual gifted amounts grow.

(But the paperwork is a chore, and all but the last 7-8 years' worth is wasted effort).

NB as Jeremy notes, the taper only applies where the nil-rate band has been exhausted - (newspaper articles frequently get this wrong).

SiliconChip

As things stand I don't believe that your combined estate would be subject to Inheritance Tax anyway as the value is below the £1 million limit for a married couple with a home to leave. Obviously that might change if house/savings/investments values go up and the limits don't. It might be worth getting some paid for advice so that you can ensure your affairs are structured in the most tax efficient way.

Flugelhorn

dales1 said:

Yes, I keep records on a draft form IHT 403 each year, to show that my gifts are out of income.

Otherwise it might be hard for my executor to reconstruct this form.

That is incredibly helpful idea, just got a copy of page 8 and will keep it up to date - the only tricky is that essentially all our income goes into one pot and is saved as one pot and the payments are made to offspring from both of us - do I need to split it all 50:50 on these sheets?