How to Give Your Money Away in the Least Taxing Way
Giving money to your family is a lovely, generous thing to do and brings you a lot of satisfaction at the same time. However, it may not be as straightforward as you imagine. Financial transactions, even within families, carry their own tax implications you need to be aware of. Those that occur after your death can seriously impact upon the finances of those that succeed you. Tax expert and founder of London accountancy firm, Fuse Accountants, Faye Watts, shares her thoughts on the best way to give money to your family.
Just to be clear, you may have already paid tax on that money, so you’ve nothing to feel guilty about when it comes to being tax efficient. All these suggestions are legitimate ways to minimise the tax spend for yourself and your children in a legal way.
Giving your children financial gifts
If you give your child (or anyone else you wish) a gift of money and you live for another seven years following that gift, that money will remain inheritance tax-free. However, if you die before then, the gift may be clawed back into your estate and may be subject to inheritance tax. The recipient doesn’t have to declare this gift on their own tax return, but it will need to be included in the inheritance tax workings of the estate. It make sense to record any financial transactions like this by doing them by bank transfer. You will then have an official record of it for the future, with an easily found paper trail, which means any history is discoverable by your executors.
You can also give small gifts out of your income provided you have sufficient income left. The same can apply to certain wedding and birthday gifts. You will need to keep a record of this. These gifts are exempt for inheritance tax purposes and will remain outside of your estate. The actual amount of what is considered as a small gift may change but the current rules are shown here.
It is far simpler to give your children money to help them buy property rather than buying it for them and transferring at a later date. The latter is more likely to bring extra legal complications and expense together with tax implications and further cost.
Be very mindful of allotting your child(ren) an interest in your own home whilst you are still living there. It’s an unlikely scenario but they may bring in friends or a spouse that doesn’t like you or vice versa and you end up feeling trapped/uncomfortable in your own home or pushed out, and I have even seen this happen.
From April 2017 teenagers/students could earn up to £1k a year without having to declare it as earned income. This means that you can pay your children (or grandchildren) money for doing occasional jobs for you, which could be mowing the lawn or updating your website.
If you want to help a child who is a student or struggling financially and run your own business, you can bring them into your business and pay them a commercial wage for doing that role, which will help them with financial independence. However, do be prepared that this will bring on implications for you in the shape of PAYE and pension obligations, so do take advice. They will still be entitled to a tax-free personal allowance the same as every individual.
Investing For Children
The most tax efficient ways to invest for your small children would be the child ISA or children’s pension scheme. This way you can save for them, tax free, while they are young. Don’t forget about the good old premium bonds too, which are also tax-free.
Let’s Talk about Control
If you’re giving money to your children, it’s important to recognise that once they have it, they can spend it on whatever they want. If that’s drugs, booze and gambling then you will just have to sit back and watch them do it. One way to stop that happening would be to set up a trust. However, these can be costly and in my opinion only worth doing if we are talking about a large sum of money or you believe that your child isn’t able to cope with the responsibility at this time.
So your house may be a beautiful, rambling home full of family history, but in reality is falling to bits and needs a lot of love and attention. Or, it’s a great home but in the middle of nowhere. What’s going to happen when you die and your children don’t want to live there and can’t afford to do it up or keep it? Meanwhile, they have a huge inheritance tax bill to somehow sort out and potentially no cash to pay it!
Inheritance tax is payable on estates that are worth over £325,000. If you are concerned this may be the case then you should definitely seek independent advice. One thing you can consider doing is take out life insurance in trust to your beneficiary(ies) to cover any tax that could become due, and again I suggest independent financial advice is sought.
Things are not the same for grandchildren. They will be liable, in tax terms, for any tax due on earnings relating to a gift, such as investment income following the gift of an investment fund or rental property, bank interest earned on cash deposit, or on the dividends from any gifted shares. But the good news is they get to use their tax-free personal allowance for that income.
Keep funds/accounts invested by grandparents separate from parental investments, as the parent(s) are actually taxed on income earned from their children’s funds if over £100 (where set up and paid into up by the parent), up until they are 18. This does not apply to grandparents. This is to stop parents putting funds in their children’s name to avoid paying tax personally!
Inheritance tax investment products
Speak to your independent financial adviser as there are various investment opportunities that could help you shelter some of your inheritance tax exposure particularly if you are sitting on cash you do not need. This may be preferable to you giving your kids the cash right now!
Don’t get caught
If you do give away an asset and still retain the benefit of using it, which could be a holiday home, it may still be considered as part of your estate, so it is essential to take good pre-emptive advice early on.
N.B. This article was written based on current tax legislation which could be subject to change at any time and this should not be constituted as advice and you should always seek your own independent tax advice.
Faye is no ordinary tax accountant and business advisor. Her background in a creative environment and seven years as a freelancer in the fitness industry, followed by running her own accountancy practice since 2008 means that she has a real life understanding of the pressures of running and growing a business. As well as her work in tax consultancy and business planning, Faye sits on the advisory boards of a number of organisations.
http://fayewatts.com and www.fuseccountants.co.uk