How Much Money Can I Give to My Children and Grandchildren as Tax-Free Gifts?
Knowing how and when to give money to your grandchildren and children will enable them to fully get the most benefit from your tax-free gifts, without paying tax more than you have to. Learn more about the way inheritance tax works and the best ways to give money to your loved ones as tax-efficiently as you can.
The world is filled with big expenses like weddings, tuition costs as well as paying off debts and stepping onto the ladder of property. It's only natural that you'd want to lend your grandchildren and children help whenever you are able to.
We'll go over some of the basics you need to be aware of regarding inheritance tax and tax-free gifts, such as the best time and method to give it up, however, inheritance tax isn't easy to understand. It is recommended to seek out professional help in case you're not sure.
What are the Rules Surrounding Gifting Money?
According to HMRC regulations, anyone is permitted to give the amount they wish to give within certain time periods without having to pay tax. Beyond those limits and outside of these conditions they are taxed just like estates in order to make sure that people do not use them to avoid paying the inheritance tax.
In general, gifts to grandchildren and children are tax-free if
● You are not able to pay more than the £3000 total amount during a tax year.
● The gifts aren't too big (less than £250 for each person).
● You can give a certain amount of money on the day of a wedding.
● You can give the money for up to seven years prior to your death.
If you don't, any money you give to someone, or a charity can be subject to tax, which can be as high as 40 percent.
What Gifts Qualify as Tax-Free?
You can give money to your grandchildren and children and not be taxed under the following situations:
Annual exemption: Each tax year, you're able to provide a total of £3,000 to whomever you wish without being taxed. If you did not use your allowance during the tax year prior then you are able to pass it on £6,000 for the next year. The exemption, however, is only carried forward for one tax year.
Small gifts exemption: You can give additional tax-free gifts that amount to £250 per person, for example, for a birthday gift or Christmas gifts,
Civil ceremonies or wedding: Parents can each give the child £5,000 in celebration of their wedding without being taxed. Each grandparent is able to give up to £2,500.
Regular payments from your taxed income: You could also offer your grandchild or child money by contributing regularly to their daily expenses or expenditures from your tax-deductible earnings. For children or grandchildren to not pay tax on these gifts The pattern of giving should be regular, like regular gifts to pay for the child's rent or a grandparent to pay fees for school. It is essential to show HMRC that giving money does not affect your living standards.
Note: In the event that you pass away within 7 years of making the transfer to your child or grandchild, it will be considered a part of your estate, and will be taxed according to the rules. But if you live beyond that, the money won't be taxed.
What Do I Need to Know about Taxes When I Make tax-free Gifts?
In reality, you could give whatever you want to your kids or grandchildren however, they could have to pay an unexpected tax if you do not take this into consideration when making your plans. Inheritance tax (IHT) is the primary tax you should consider when giving cash.
How Does Inheritance Tax Work?
IHT (inheritance tax) is a tax you pay on your estate as well as certain lifetime gifts made after your death. The term "estate" typically refers to your home, assets, possessions and the like in addition to any outstanding dues that you have.
Typically, IHT (inheritance tax) will only need to be paid if the worth of your estate is greater than that threshold of £325,000. Anything over this threshold is generally taxed at 40 percent.
If you're making gifts during your lifetime, then there's also your 'annual exemption' to think about.
It is also possible to get an exemption on gifts made from your income that do not affect your living standards or require you to draw from your savings. The tax-free gifts will usually have to be regularly scheduled and you'll need to keep the records of your executors to verify this.
IHT and the Gifting
Sometimes, the tax-free gifts you make during your lifetime could be taxed upon your death. In general, any amount that you give beyond the annual exemption of £3,000 can be added to the amount of your estate if you do not live for seven years afterwards.
Donating other Assets
Tax on capital gains (CGT) is a different tax to be considered when making a gift. CGT is the tax you pay on any profits earned by selling an asset that isn't cash or a gift that has grown in value. This includes, for instance, the property (other than your primary home) and personal possessions that are worth £6,000 or greater, or shares that aren't included in your individual savings accounts (ISA) or pension scheme.
Giving away assets in the form of a gift is considered to be a 'disposal of an asset' this means you might have to pay tax in the event that you gift an item like this to a grandchild or a child. It is possible to get an exemption for the annual of £12,300 on gains (for the tax year 2022/23) prior to any tax that will be due on any gain. The assets are also subject to the seven-year rule which means that IHT and CGT may be due.
What Can I Do to Give My Grandchildren or Children Tax-Free Gifts?
That's a lot of kinds of tax that you need to take into consideration. In order to make things simpler Here are some tax-efficient ways to donate money to your kids and grandchildren.
Give Regularly
The gift of £3,000 can be carried forward for a year, but if you don't utilize it in the two tax years you'll forfeit the option. Therefore, giving money to loved ones regularly is effective in reducing the IHT due to your estate upon your death.
Give Larger Tax-free Gifts but be Aware of the Seven-Year Rule
If you decide to donate more money to someone else but they won't count for IHT purposes, for as long as you're alive for seven years following the gift. If you don't live for the entire seven years, the amount you've donated is added to the estate's value.
Contribute to their ISA
You could open the Junior ISA (JISA) for your child, or save it into JISA on behalf of your grandchild. You can pay up to £9,000 during tax year JISA. JISA and the funds can be invested, giving the opportunity to grow the savings of your grandchild or child over time.
The money can be accessed once they turn 18 and will not have to have to pay tax on the money that they take out of the JISA or pay CGT for any growth in their investments.
It is also worth giving them a Lifetime ISA. Based on the age of the person, the amount you give to a grandchild or child to help them save money into a Lifetime ISA could help them save money for a house or increase their retirement savings.
This Lifetime ISA can only be opened between 18 and 39. So, you aren't able to make it available to those who are older than that. There are a few requirements that you have to meet in order before you can get a Lifetime ISA, which you are able to read more about at Gov.uk.
Think about the Benefits of Using a Trust
Many grandparents could plan to leave money to their children by way of a Will. What if you want to provide them with financial support even if you're no longer in the same position? A trust will allow you to do this, while also providing a variety of benefits.
As trustees, you have the ability to control the amount of money you pay them and gifts to the trust may decrease your estate's value for IHT. The use of the discretionary trust provides grandparents with the most freedom and control, but the tax burden is greater and more complicated. In particular, while the majority of tax-free gifts described in this article may be covered under an exemption or be a tax-free move, making a donation made to the discretionary trust is an irrevocable transfer that is tax-free and may be subject to IHT at the time that the donation is received.
This can be simplified when trustees decide to put their money into the form of an overseas bond because the bond won't produce revenue. If the funds are required to cover university costs, for instance, bonds may be given to the grandson. Any gain that is chargeable following the assignment will be taken into account by the grandchild who is a student and would likely be tax-payer-free at all times. A bond that is offshore within the discretionary trust could be a good way to combine control and tax effectiveness.
Consider Using Your Pension Savings
If you're 55 or older (rising to 57 by 2028) you'll be able to access your pension savings, and typically receive 25% of the pot tax-free. Therefore, you might want to think about using a portion of your tax-free lump sum as an offer to your beloved family members.
Keep in mind that your savings from pensions need to last until retirement, so ensure that you don't give away things you may require later on. Additionally, making use of your pension funds to support your family members doesn't mean that it will have to be done in your lifetime. This is especially true in the event that taking money from it today means that you don't have enough to pay for yourself.
It is also possible to think about nominating a family member to be a beneficiary so that your pension plan is transferred to them. The pension plan you have isn't typically included in the estate of your deceased, therefore your beneficiaries won't have to pay IHT for it but they may have to pay tax on any money they decide to withdraw in the event that you die at 75 years of age. It's not the case with any pension scheme but verify with your provider if not certain.
Use a Child's Bank Account
Perfect for small amounts of cash, bank accounts are convenient and easy for friends and family members to deposit cash into. Also, giving children the ability to access their money accounts can assist them in managing their own funds. Be aware that the amount of interest is generally low and inflation could eat away at any gains. Remember, any gifts made to them will be a part of your estate after seven years (unless they are protected through the exemption).
What are the Main Differences Between Gifting to a Grandchild and Gifting to a Child?
If your child is getting married, you may give tax-free gifts of at least £2,500 during a year to a great-grandchild or grandchild (on top of that annual allowance). This amount rises to £5,000 for children of yours.
Additionally, as a grandparent you cannot create the JISA for your grandchild - it must be initiated by the child's legal guardian.
When you're the parent giving gifts to a child who is not married and they're under the age of 18 when the gift generates interest or pays dividends over £100 during any year of taxation, you must follow certain additional rules. The gift's earnings are taxed as if it were your own. This is in order to prevent parents from trying to obtain an exemption from taxes from their own earnings by taking advantage of their allowances. This doesn't apply to grandparents, nor to gifts given by parents for their kids' JISAs.
There are Many Options But There is Plenty to think About
The positive side lies in the fact that there exist a variety of tax-efficient methods to help the people you love. In addition, keeping records of your donations will allow those you love most to claim the tax benefits to which they are entitled upon your death.
It's a complex field, so it's advised to seek advice regarding your family's situation to ensure you get the most out of your money and also their future. If you do not have a financial advisor and are looking for one, you can call us at 07985689912.
Note: Your individual circumstances such as where you reside in the UK can influence your tax bill and laws and tax regulations could alter in the future.