United Kingdom

We want to help our kids out but should we lend or gift the money?

We are keen to help out our daughter and son-in-law who have been struggling financially since the start of lockdown. 

However we're not sure whether to gift or lend them the money.

We're happy to part with the cash if it helps them out, but we're not sure of the tax implications of just giving them thousands of pounds.

Could it possibly affect their inheritance if we gift them the money now? 

Does gifting large sums of money to your children affect their inheritance?

Liz Cuthbertson, private client tax partner at accountants Mercer & Hole, replies: In these difficult and uncertain times there is financial help that parents can give their children in a tax efficient way.

Cash gifts to family members can be particularly tax efficient. There can be inheritance tax consequences of making gifts but with careful planning, simple gifts can achieve longer term tax savings.

If a substantial cash sum is required a simple outright gift can work very well. 

Gifts are known as 'potentially exempt transfers' for inheritance tax purposes. For a gift to be complete, it must be unconditional – ie. the parents must not derive any benefit from the funds once the gift is made.

There is no limit to the value of a potentially exempt transfer and provided the donor survives a full seven years from the date of the gift there will be no inheritance tax payable. 

Liz Cuthbertson, Private Client Tax Partner at accountants Mercer & Hole

Therefore, after seven years, inheritance tax at 40 per cent on the value of the gift has been saved.

Taper relief applies after three years, reducing the inheritance tax payable on the funds gifted. Therefore, in the event the donor does not survive the full seven years there can still be some inheritance tax saved. 

In the case of more modest gifts, every individual has an annual exemption of £3,000 per tax year. 

So, mum and dad could make total gifts of £6,000 in total across their children per tax year.  

Gifts within the annual exemption reduce the parents’ estate immediately and are fully exempt from inheritance tax.

In addition, if they have not used up this relief in a previous tax year, they are allowed to carry forward the relief for one year only. So, if parents have not used their annual exempt gift allowance last year, they will be able to each make gifts of £6,000 in the current tax year.

Another tax efficient strategy is for parents to make a gift out of their surplus net income of the year. Provided the conditions are met, the gift is immediately exempt from inheritance tax. 

These conditions are that the gift formed part of your normal expenditure, the gift was made out of income, and that the gift leaves you with enough income to maintain your normal standard of living.

 Provided you live seven years from the date of the gift there will be no inheritance tax payable

Factors that may be considered include the frequency and amounts of the gifts, the nature of the gifts and reason for it. Clearly, no one knows how long the economic disruption and impact will last but if sustained support is needed, this relief is worth exploring.

The parents will need to demonstrate that the gift was made from surplus net income, ideally arising in the year the gift was made before considering earlier years. 

So, if parents have more income than they need and are likely to continue to do so, this relief is probably going to help.

If parents do not wish to make outright gifts, they could consider loaning the funds to the children. 

The loan can be interest free and should be evidenced with a simple loan agreement. Just be aware that, if the funds are not repaid, the loan will be classed as a gift. 

It is worth ensuring a loan agreement is drawn up which sets out the terms of repayment to avoid any ambiguity. There must of course be an intention to repay the loan from the outset otherwise it is going to be classed as a gift from the start.

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