Gifting money to your children may seem like a great way to help them financially, but while there is 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 is what you need to consider before writing a cheque to your children.
Inheritance tax sees the government take a slice of your estate before it is passed on to your loved ones; it is also applied to any monetary gifts you give in the 7 years preceding your death.
The main concern for many parents gifting money is that their children will face an inheritance tax bill should they pass away.
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 is 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 will not increase again until April 2017.
Exemptions and allowances
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 2015/16 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 is 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 have not 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 GOV.UK.
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 do not have to sell your home to fund the payments.
Unless you have a significant amount in savings it is 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 GOV.UK.
Gifts are not eligible for income tax as they are not classed as source of income by HMRC and therefore you do not need to worry about income tax when gifting money to your son or daughter.
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.
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 2015/2016 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 £10,000 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 has introduced 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 does not count towards the £100 per parent tax free interest limit.
Junior ISAs are available for any child under 18 who wasn't eligible for the outgoing, and you will be able to contribute up to £4,128 each tax year.
Loss of benefits
Something else to think about before you gift money to your children is the impact it might have on their rights 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.