Most people want to financially support their children and grandchildren at some point in their lives, but tax rules are complex and change if money is passed down before or after death.
Here we discuss the factors that determine when your money should be handed over.
How long will you live?
The key point when gifting to children in your lifetime is how long you live after the gift is made. If death occurs seven or more years after the gift will be completely free of inheritance tax. If, on the other hand, seven years haven't elapsed the gifted amount is included as part of the parent's estate.
Every individual has a personal allowance of £325,000 which is free from Inheritance Tax. As of April this year everyone now has an additional £100,000 as part of their residence nil rate band. This means one person's estate, including a main residence, up to £425,000 will be free of inheritance tax - which is charged at 40% on any amount over. A married couple or a surviving partner can pass on £850,000 in the 2017/18 tax year.
Gifting during your lifetime
If you can afford it and are confident you will survive for the next seven years then gifting during your lifetime is likely to be the best course of action. You are limited to gifting £3,000 per tax year, however certain gifts are exempt from this limit, including wedding and birthday presents.
You can also set up trusts to pay for specific events, such as a discretionary trust to pay for university fees. Like individuals, each trust has a £325,000 nil-rate band for inheritance tax purposes. There are various types of trust and the tax liabilities of getting it wrong are horrendous. You should take the time to speak to a specialist solicitor if you are unsure. Set up fees are at least £1,000 and there are annual admin fees. As a result of this, trusts should only be considered for amounts of £100,000 or more.