Many parents are keen to pass on wealth that they have accumulated during their lifetimes, usually to children or grandchildren. Careful gifting and the potential use of trusts can ensure that inheritance tax (IHT) is not charged and that any money given will be used as intended.
Each individual can give up to £325,000 free of inheritance tax, on death but also taking into account the value of gifts made within 7 years of death. Ordinarily, any value of the estate on death above this amount will be subject to IHT at 40%.
An outright gift will only become taxable if it exceeds £325,000 and if the person making the gift dies within 7 years. Survival for longer than this should make the gift tax free.
Other inheritance tax exemptions include:
- the annual exemption of £3,000
- small gifts exemption of up to £250 per recipient
- gifts out of surplus income – beware of the conditions: the gifts must be made out of surplus income and made with some degree of regularity (e.g. monthly, quarterly etc) and ideally to the same recipient(s)
- marriage gifts of up to £5,000 per child (£2,500 per grandchild).
Sometimes an outright gift may not be suitable if, for example, a child has financial difficulty, e.g. in a rocky business venture or a problematic relationship. Any money given to them outright could pass to their creditors or a former spouse in a divorce. Therefore, using a discretionary trust may be better. Each individual can gift into trust a maximum of £325,000 without paying IHT, but you must survive 7 years for the assets placed into the trust to escape IHT.
The Trustees will have the power to decide which of the beneficiaries of the trust can benefit, in what proportions and when. A discretionary trust is, therefore, a tax-efficient and flexible way of ensuring that funds are protected for the benefit of your children or grandchildren in the future.
Outright gift, or trust? You decide!