INHERITANCE TAX - 08.06.2020

Helping with family finances - is there a tax cost?

Your adult child is struggling with money and has come to you to for help. You’ve been paying some of their household bills until they get back on their feet. What tax consequences do you and your child need to consider?

Receiving gifts

Over the years you might have overheard the proverbial man down the pub warning folks about the perils of “gift tax”. It’s a common theme but really quite surprising as gift tax doesn’t exist (at least not in the UK). If you receive a gift from an individual you’ll never have to pay tax on it of any sort. However, there can be tax consequences for the person who made the gift.

Making gifts

If you give away a lump sum or a series of smaller gifts to an individual, say a family member, there are no immediate tax consequences to worry about (it’s different for gifts to non-individuals, e.g. trusts or companies, but that’s a story for another day). In the longer term gifts can reduce the inheritance tax (IHT) on your estate when you die.

Tip. Because a gift to another individual doesn’t fully escape IHT until seven years have passed you should keep records of any you make and put them with your financial papers so that your executors can find them.

Trap. Not keeping the proper records could result in IHT being paid unnecessarily as the solicitor or other person handling your estate is required to declare some types of gift made in the seven years before death. This can mean a higher IHT bill and so reduce the amount in your estate left to your beneficiaries.

Record keeping

The person filling in the IHT forms for your estate will check your bank etc. records for payments that could be gifts. To prevent these being wrongly reported to HMRC you should make sure your record of gifts includes the right information. Apart from noting the date, amount and recipient you should indicate whether you think it’s exempt from IHT. Most exempt gifts don’t need to be declared to HMRC by your executors.

Exempt gifts

The good news is that there are many IHT exemptions for gifts. For example, gifts:

  • to your spouse or civil partner
  • when someone gets married
  • which are regular and made from your income
  • of up to £3,000 per tax year.

The penultimate exemption can apply if you need to help out someone who is in financial difficulty, say a family member.

For detailed commentary on IHT-exempt gifts, visit http://tipsandadvice-tax.co.uk/download (TX 20.18.06).

Gifts from income exemption

Where you make regular gifts to an individual that are less than your income and allow you to maintain your normal living standards, the penultimate exemption in the list above applies. However, it’s an exemption that HMRC scrutinises closely and gifts to which it applies have to be declared by your executors. This makes it especially important that your records clearly show where you regularly make gifts to the same person, including where, say, you pay bills on their behalf.

Your child doesn’t have to worry about tax; gifts are not taxable. There are also no immediate tax consequences for you. However, keep a record of gifts you make for at least seven years. Your record should show who you made the gift to, how much it was and whether you think an exemption applies, e.g. for regular gifts from your income.

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