Will I be liable to pay inheritance tax when gifting money to a child / grandchild?
Parents and grandparents are often keen to contribute to children's savings as a way of rolling wealth down the generations and potentially reducing inheritance tax (IHT).
Each person is allowed to give away up to £3,000 a year inheritance tax free. This is known as the annual gift exemption. On top of this, you can give up to £250 each to any number of recipients each year, though not to anyone who has also received a gift under any other IHT exemption.
You can also make 'gifts out of income' free from IHT. These are regular payments you make out of excess income. As long as these payments have no detrimental effect on your standard of living, they are immediately exempt from IHT. This exemption can be useful for those wanting to contribute to regular savings investments for children.
Sums which don’t fall within one of the IHT exemptions are treated as potentially exempt transfers (PETs). Providing you survive seven years following the gift, they will also be IHT free. If not these PETs will be added back into your estate for the purposes of calculating inheritance tax, although any growth in the value of the gift is immediately free of IHT. Making these gifts as early as possible increases the chance of surviving seven years and reduces the prospect of inheritance tax on these amounts.
This information should be viewed as an indication of the rules currently applicable and any figures quoted relate to the current tax year (2018/19) unless stated otherwise. Tax law is notoriously complex and we cannot replicate every rule, nuance or exemption here. Therefore you should not make, or refrain from making, any decisions based on this information alone. If you are in any doubt as to the suitable course of action we recommend you seek advice.
Remember tax rules can change and any benefits depend on your personal circumstances.