Helping your children out financially is something every parent would like to do, but you need to be careful if you donít want them to face a hefty bill from the taxman. Hereís what you need to know.
Gifting money to your children may seem like a great way to help them financially, but while there’s no limit to how much you can give there are tax implication to consider.
Give them the cash at the wrong time or in the wrong way and they could end up being chased by the tax man at a later date.
Here’s what you need to consider before writing a cheque to your children.
The main concern for many parents gifting money is that their children will face an inheritance tax bill should they pass away.
Inheritance tax sees the government take a slice of your estate before it’s passed on to your loved ones; it is also applied to any monetary gifts you give in the 7 years preceding your death.
Your estate (the property, possessions and savings you leave behind) is valued when you pass away.
The first £325,000 of anything you own escapes inheritance tax (it’s referred to as the nil rate band), however any amount over this is taxed at 40%.
For example, say your estate is valued at £425,000, the first £325,000 of this would escape inheritance tax. However, £100,000 of its value would be taxed at 40% so the tax man would claim £40,000 before the balance is passed to your next of kin.
The exception to this is if you are married as you can pass your full estate to your spouse in the event of your death without paying any inheritance tax.
By doing this you also pass on your £325,000 inheritance tax exemption, so £650,000 of your combined estate would remain free from inheritance tax on their passing.
The inheritance tax threshold was frozen at £325,000 in 2010 and it won't increase again until at least 2014. However, prior to this the threshold increased each year. You can check current and previous year’s Inheritance Tax thresholds on the HM Revenue & Customs website.
Aside from the Inheritance Tax exemption threshold, there are a series of additional exemptions and allowances that enable you to gift money without the threat of Inheritance Tax - here are the most relevant if you are considering giving money to your child.
Everyone gets an annual gifting allowance and this allows you to gift a certain amount of money to anyone you choose each year without the threat of inheritance tax.
The annual allowance stands at £3,000 for the 2013/14 tax year, which means you can gift up to £3,000 to your children (or to anyone else you choose) this year without any inheritance tax implications.
It's important to bear in mind that this £3,000 limit applies as a total and per person, so you would need to split the £3,000 between your children, rather than giving them £3,000 each if you wanted the money to remain exempt from inheritance tax.
However, if you haven’t used last year’s allowance you can gift £6,000 this year and still avoid inheritance tax issues.
If you are planning to give your son or daughter a gift to celebrate a special occasion then you may find that the gift is exempt from its inheritance tax liability.
Parents can currently give their son or daughter up to £5,000 as a wedding or civil partnership gift, tax free.
However, this only stands if the marriage goes ahead; if you make the gift but the wedding is called off or cancelled then it will not be exempt from inheritance tax.
Small cash gifts are also exempt, and each year you can give up to £250 to as many people you like without any inheritance tax liability.
You can find full details of gift exemptions on the HMRC website .
If you want to lend a financial hand to your son or daughter, then you might want to consider opting to pay them a regular amount each month rather than gifting a lump sum.
This is because regular payments are excluded from inheritance tax liability, as long as they come from your income (not your savings) and don’t affect your lifestyle i.e. you don’t have to sell your home to fund the payments.
Unless you have a significant amount in savings it's likely that any value tied up in your home will be the main asset that will push your estate over the inheritance tax threshold.
However, selling your home and gifting the money to your children, moving in with your children or even pooling your resources to purchase a new home together could see them face an inheritance bill at a later date – even beyond the 7 year exemption rule.
This is because ‘gifts with reservation of benefit’ – for instance, if you give your home to your children but continue to live there, or move in with them – aren’t exempt as you will continue to benefit from them. Consequently the 7 year exemption doesn’t apply and the gift will still be liable for inheritance tax on your passing.
For more information on gifting property, or selling property and gifting the money to your children and its impact on Inheritance Tax, visit the HMRC website.
For more information on the potential impact of inheritance tax on gifts to your children, read our guide: How Do I Gift Money Without Being Taxed?
You may be concerned that by gifting money to your children they will be pushed into a higher income tax band, or be liable to pay income tax on the gift itself.
However, this is a common misconception and as long as your child is over 18 is not the case.
Gifts are not eligible for income tax as they are not classed as source of income by HMRC and therefore you don’t need to worry about income tax when gifting money to your son or daughter.
For a full list on income tax eligible income visit the HM Revenue & Customs website.
If you want to start building a nest egg for your child ready to pay for tuition fees, a deposit on a new home or perhaps a car when they reach adulthood, then you need to be aware of the rules governing financial gifts to children under the age of 18.
While there is no limit on the amount of money you can give your child each year, if the interest they earn on the money exceeds a certain amount it could be taxed.
The reason for this is to prevent parents from using their child’s tax free allowance to avoid paying income tax on their own money.
For the 2011/2012 tax year children can earn up to £100 interest on any money given to them by a parent, tax free – anything they earn over this will be taxed as if it were the parent's income.
Similarly the £7,475 income tax threshold that applies to adults also applies to children. If they earn more than this in income during the course of the tax year, they will need to pay income tax on any excess.
Following the withdrawal of the Child Trust Fund, the government is set to introduce a replacement in the form of the Junior ISA. These are designed to help parents save for their children’s future and importantly are tax free.
As an added benefit, the interest your child earns on money you pay into their Junior ISA doesn't count towards the £100 per parent tax free interest limit.
Junior ISAs will be available from 1st November, 2011, for any child under 18 who wasn’t eligible for the outgoing Child Trust Funds, and you'll be able to contribute up to £3,600 each tax year.
You can find out more by reading our guide The Junior ISA: Your Questions Answered.
Another consideration before gifting money to your children is any impact it might have on their right to claim benefits.
Although gifts are not classed as a source of income, and therefore cannot put your child’s earnings over the benefit thresholds, some benefits are dependent on the amount of savings you have in the bank.
For example, if your child is currently receiving income support and your gift would see their savings increase to over £16,000, they could lose their benefits as a result.
To avoid your son or daughter losing any income from benefits it makes sense to sit down and check if a gift you wish to give would cause any issues.
can my wife as well as me give each of our sons ?3000 every year
I assume - YES
Each parent can give a child 3000 per year
My friend was talking about inheritance tax last night when a property passes to a child after parents passing. She said the taxman will take 40% of the estate, I had read that the threshold value for this has to be over £325k as you have stated above, but she said if the property is passed to a child rather than spouse it's taxable whatever the value i.e. £200k would be taxed at 40%?
Please clarify because, I understood it to be as you have above if an estate passes to child and is under the value of £325 it is tax exempt? I am very confused now..
I think your friend may have got a little bit confused, your initial assessment is correct, the first £325k is exempt from Inheritance Tax as it falls under the 'Nil Rate Band'.
Only the estate value over the £325k threshold is subject to Inheritance Tax.
You can read more about the threshold here on the HM Revue & Customs website:
I hope that clears things up :-)
Can my parents sell their home, give me say £200K for me to buy a bigger place? Then they move into my old place, which I still own?
If your parents choose to do this then they would be considered to be living in a pre-owned asset and their share of your new home would likely still be subject to inheritance tax.
You can find out more information about your situation on the HMRC website here (under the selling your home and giving money to your children section):
Is it possible to gift the money to a joint savings account in the parent and child's name, so that if the parent needs the money for care they can access it, if they pass away it is protected by the annual allowance? Or is that having cake and eating it.
thanks will check if a gift will cause any issues as my child is also in a divorce issue regarding money which may make a difference
If regular monthly payments are made are they then subject to income tax?
If my parents give me a gift of £60K, do I need to pay tax on that? They are elderly but in good health. I am a basic rate tax payer, but currently in-between jobs (hopefully).
You don't need to pay income tax as the money was a gift, the main concern would be Inheritance Tax, which would only be payable if your parents died within 7 years and if their estate was worth in excess of £650,000 (£325,000 allowance per parent).
There are some exceptions to this however, which are outlined in the guide above.
If my parents put their house in my name to move into sheltered housing, would I have to pay inheritance tax? Their house has been valued at £140,000
There are specific rules regarding this, especially if HMRC felt your parents had given you the property to avoid paying care home fees.
You can read more about this on the HMRC website:
Can my parents gift me their life savings of £80,000, I use that money plus mortgage a further £80,000 to purchase a property for them to live in paying me rent to help cover the half I have mortgaged. In this scenario could they be entitled to benefits to help cover the rental costs on the property?
I am 25 years old and my parents (both alive and healthy) have gifted me £64,000 to help with my personal finances. Is this gift liable for income tax to either me or my parents ? Should either of us declare it ?
If a parent pays for their child's wedding, ie hotel, caterers etc can they still give the £5,000 IHT exempt amount in addition to paying the fees for the wedding costs
I would like to pay off my daughter's mortgage. The sum outstanding is £20k and I would be paying this sum direct to the bank. Will this affect her benefits?
Your article talks about regular payments to your children which are tax free. I can't find any reference anywhere else. Is there a limit and I assume regular means monthy?
Could my dad gift me £3000 for last year and £3000 for this year and also gift his grandchildren (2 of them) £3600 each to a junior Isa without any tax implications?
My mother set up a bond for my sister and myself well over seven years ago. We would like to use this money now. Would we have to pay any tax on it? It would be about £53,000.
Can someone help me please? I was a beneficiary of my great aunt and uncle's Estate in 2010. My aunt died in 2009 and he passed away in 2010. However, the property she owned jointly with my uncle was not included in the Estate Accounts. I subsequently found out that he had given the property to his daughter, as I checked the Land Registry. She was not my aunt's daughter, she was my uncle's from a previous marriage. Where do I stand on IHT/CGT? If the property was included in the Estate it would have gone over the IHT threshhold. I believe the daughter has siphoned off money, withouth incurring any penalties, and I have found out she sold the house last year for £250k.
My initial thoughts on this would be that if you were paid out of his estate then any tax due would have already been paid. Who were the executors of his estate? If the house was gifted to his daughter then it will be her who is liable for any CGT. They would have each had an IHT allowance, so the total estate would have had to have been over £650K, £325k each. How long before their death was the house gifted? If more than 7 years then it may well have been exempt.
Hi, thanks for getting back to me so promptly. I was paid out of this Estate you are correct. The Executors were his daughter and the solicitor. The house was gifted in 2009 and death in 2010. However, I still do not understand why the property was not included in the Final Estate Accounts.
You would need to address that question to the solicitor. Maybe the house had been gifted to his daughter back at the time his first wife died and formed no part of the later estate. But at least if a solicitor was involved then you can be fairly certain that any duties or tax would have been paid before any money was paid to you so you would have no further worries on that part.
i would like to give my daughter all my inheritance money which is 20k im on all benefits including dla i dont wont to lose any of them but also i dont wont the money
My father lives in the Philippines and I work 20 hrs a week for his business since I left my role of Finance Director to look after my 2 children part time. I get around £2500 pcm for this work and it comes out of the business ultimately that is based in Hong Kong. What is my position? Should I see this regular payment as a parent to daughter gift for the purposes of tax? Or should I see it as income (which I would prefer to do) and if so, am I eligible for tax given that it is not a British company and has no base here?
If my father was to give me £20,000 and I paid £14,000 off of my mortgage leaving us with £6000 in the bank, would this affect our benefits? we have no other savings
I am about to buy a house with a gift from my parents (both below 60) of 100K. They are not UK resident but live in the UAE and are both europeans (i.e. no ties to this country at all). are there any tax liabilities for this set up?
In addition I have been receiving money from them monthly of £500 for years. I have never even thought of declaring that. Am in Breach of some tax law? Mind you I have only been in employement since 2010 as I was a student before hand.
I have been left £67K and receive child tax credits will this amount affect them? also i have been considering paying off my step fathers mortgage (the house is being left to me and my children in the event of his death) would this cause ,problems for me or my step dad?
My estate would be less than the inheritance tax threshhold - can I gift £12000 to each of my daughters now with no tax implication?
As long as your estate didn't subsequently increase in value (inc the £12k you gift to your daughters) then you should be fine.
Thank you Martin! Please see my subsequent post, hope you can help...
Further to my previous post concerning gifting £12k to each of my daughters, I am downsizing my house and this £24k is surplus to what I can have before I would have to pay for continuing care in my home and continuing to receive income support. Would social services et al consider I was trying to hide savings?
HI Sharon, this is more difficult to say, in reality you should probably check with your local authority what they permit and/or speak with an independent advisor before making a decision.
Sorry we can't be of more help on that front.
Mu husband and I are giving our son funds towards the deposit for a flat. We are pensioners and will be liable for inheritance tax. We have our own bank accounts, not a joint one. Does it matter if one of us gives him all the money or should we give him half each? Are there any implications for inheritance tax for either route?Hope someone can advise. Thanks in advance.
if my parents give me 20k would I be liable to pay tax?
I have properties which are mortgaged. If I die before my daughter reaches 18 and the properties have appreciated, then she will have an IHT bill to deal with. Can I legally start giving her the equity in trust over the years despite the mortgages so that the 7 year rule protects her?
I have a little money put aside and have decided to buy a house and rent it out. If I register the house in my sons name but keep the rent ( and declare the rent on my tax return) will this cause any legal problems
My mother sold her home 3 years ago. My brother and sister in law sold their home at the same time. It would seem that my mother put 200k into a home that my brother and SIL then bought and my mother moved in with them. My brother and SIL are now split and divorcing. The house has been sold and they're moving in a months time. It seems my mother did not put her name on the title deeds and my SIL is refusing to hand back 100k ie 50%of the original fund from my mother. My mother is going into sheltered housing as no one can now house her. Can my SIL do this? Are there tax liabilities/implications and can my mother be housed by the local authorities having to pay her rent when she has put 200k into a property.
can my wife and I give £3000 each making a total of £6000 per annum tax free
Yes, you both have an allowance. There are different tax rules depending on whether you are worth more or less than £650,000. If less, you can give away what you like. If more, then any tax that may be due will be paid by your estate after your death.
can my mother give me 50 thousand as a present?
Of course she can.
This may sound stupid but my mum is 80 and has a savings account with 22k in it she did plan to leave this in her will to us but has now decided that she would like to give us £10000 each now.... Can she do this as her bank are really confusing her what is the easiest way for her to do this
It is her money and she is free to do with it what she wants. The easiest way would be to write each of you a cheque. The bank may be just be concerned for her welfare and are probably covering themselves in case you are pressurising her to hand over her money. I'm sure that is not the case but it does happen. I faced similar reluctance when i took over the Mother in Law's finances even though i had Power of Attorney. The one thing you do need to be aware of at her age is that she may need care in the near future. The Local Authority would be within their rights to demand at least part of the money back if they deemed she had given it away to avoid paying for her care.
Thanks for your advice, would I personally be laible for any tax or questions from my bank?
No. You are not liable to pay tax on a gift, and it has nothing to do with the bank where it came from. I have never ever been asked the source of large cheques I have banked, but if they ask just say it from your mum, they do not need to know the why.Or if she has online banking set up then send it by BACS.
I have a question which I have searched for everywhere but cannot find an answer. If a married couple with a combined estate of £850,000 wish to give a large lump sum to their children in the hope that one (or both) will live seven years... to save on IHT, does it matter which bank account name the money originally came from? I.e. If one of the couple dies within 7 years of the gift being made, does half of the gift automatically get added back into the value of the estate again at this time? Or if all the money was gifted from the survivor's bank account, is there no effect until that person dies themselves?
Just the question I would like answered too? Seems impossible to find an answer online - any heLp Martin?
Hello. my 85 year old Mum has just got a 10k refund from DWP as her pension was underpaid. She wants to give 2K each to her 4 children. I looked after her for 5 months & my finances are affected & I really need the money, however my brother says we can only take £750 each because there's a 3K annual allowance for family gifts. Can you advise please? Thanks.
I gift my adult daughter £3000 per annum, does she need to declare this as income for tax purposes?+Gillrb
My Father-in-law wants to sell us the house we rent off him. He wants to sign the house over to my wife and we pay him £300 a month for ten years in return. Is this ok?
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