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Finance: How much can we give away each year?

Tony and Jan from Stowmarket wrote to ask: “We want to give some money to our four grandchildren to help them with general education costs and buying equipment for school and university. Are there any limits on the amounts we can give and will the gifts be liable to inheritance tax?”

You can each give up to £3,000 a year free of tax from capital – i.e. from savings or investments. (That’s a total gift of £3,000 from each of you, not £3,000 to each grandchild!)

Also, you can give individual gifts of up to £250 per person per tax year to any number of individuals, regardless of whether they are children or grandchildren.

Wad of cash (47846818)
Wad of cash (47846818)

If any of your grandchildren marry, you can make a gift in consideration of marriage. You can make a wedding gift of up to £5,000 if you are a parent, or £2,500 if you are a grandparent of the bride or groom. These gifts are also exempt from inheritance tax.

Regular and habitual gifts from income are also exempt from inheritance tax, but of course, not many of us have that much surplus income that we can afford to give it away to other members of the family. That’s why the government allows this exemption.

Although in theory you can gift any amount to anyone, most other capital gifts will usually be potentially liable for inheritance tax, depending on the type and amount of gift, and how long you survive for after making the gift.

If you die within seven years of making a capital gift, there may be a reduction in the rate of inheritance tax due on a sliding scale in the fourth, fifth and sixth years. After the seventh year, the gift is deemed to have dropped out of the estate of the donor completely. This type of gift is known as a Potentially Exempt Transfer or PET. So, after you make the gift, the clock starts ticking. If you live for seven years or more, the gift will not be part of your estate when you die and there will be no inheritance tax due. If you die within seven years, the tax will be based on the above sliding scale.

However, this seven year ticking clock loophole only works for an absolute gift where the donor retains no interest or benefit from the asset or money gifted. If the donor retains an interest or benefit in the gift, then it may fall foul of the ‘Gifts with Reservation’ rules. For example; Someone who gifts their house to their children but stays living in it rent free would be making a gift with reservation of benefit. That means that the gift would not be recognised for tax purposes and in the event of the donor’s death, the full value of the house would be included in their estate for calculation of the inheritance tax due.

Nick Plumb is an Independent Financial Adviser and Practice Principal at Plumb Financial Services. Post your questions to Nick at Plumb Financial Services, Baylham Business Centre, Lower Street, Baylham, Suffolk, IP6 8JP, e-mail nickplumb@aol.com, or telephone Nick on 01473 830301. Nick’s answers to reader’s questions in this column are provided only as a general guide and do not constitute personal financial advice. Any readers who require advice should contact Nick to arrange a complimentary initial consultation to discuss their own position.

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