Leaving a legacy and passing on your estate to loved ones is usually a big part of people’s financial plans.
Gifts to spouses, civil partners and charities can usually be made tax free. However, gifts to children or grandchildren have different rules when it comes to Inheritance Tax.
What counts as a gift?
A gift can be anything that has a value including money, property and possessions.
How much can I gift to my children?
Each person has an annual exemption of £3,000 per tax year which can be given away free from Inheritance Tax. Any unused exemption will carry forward for one year.
You can also make more substantial gifts to your children, however the ‘7 year rule’ will apply in terms of Inheritance Tax. If you die within 3 years of making the gift then the full 40% tax will apply to the gift. The tax then reduces on a sliding scale for the next 3-7 years. After 7 years has passed since making the gift, no tax will be due as the gift is no longer included in the value of your estate.
Because of this rule, if you wish to make large gifts to your children you should speak to a financial adviser as soon as possible as it is important to plan in advance to mitigate the risk of tax being due.
Gifting to children or grandchildren for a wedding
Gifts towards a wedding or civil ceremony are up to certain limits automatically exempt from Inheritance Tax. You can gift £5,000 for a child, £2,500 for a grandchild or £1,000 for anyone else.