Many parents and grandparents give money to their progeny, and lots of them, like John and Glenda, ask me about the tax implications. “If the Bank of Mum and Dad pays for their grandchildren’s school holidays, swimming, tennis lessons etc, is this charged against the £3,000 yearly Inheritance Tax allowance?”
There are a lot of exemptions to be applied when it comes to working out Inheritance Tax.
Any amount left to a spouse is completely exempt. The first £325,000 that is left to others is exempt and that can be up to £425,000 this year if you’re a homeowner. Those amounts are normally doubled for the heirs of a widow or widower. In practice, 19 out of 20 estates do not pay Inheritance Tax at all.
If you give money away, it is also totally exempt from Inheritance Tax if you die more than seven years after making the gift. If you die within seven years, the main exemption is the £3,000 John and Glenda mentioned. You can give that much away every tax year without it counting as part of your estate. A couple can give away double that and if you gave nothing in the last tax year, then you can carry the allowance forward and give away £6,000 – or £12,000 between a couple.
You can also give a wedding gift of up to £5,000 to one of your children, £2,500 to a grandchild or great-grandchild and £1,000 to anyone. Gifts of up to £250 to any number of people are also exempt – but not to anyone who benefited from part of the allowance of £3,000 or wedding gift that year. If your income is more than you need to live on, then the surplus income can be given away exempt from Inheritance Tax. Keep records of your income and gifts from it.
Gifts to your children – but not grandchildren – for their maintenance, education or training are exempt if they’re under 18 or still in full-time education. This includes university fees and living costs.
It’s a complicated picture, then, but there are normally no other tax consequences of giving money to your children or grandchildren, for you or for them.