Early inheritance – The latest trend

The financial disruption caused by coronavirus has led many parents to consider giving a living inheritance to their children. Jason Blunden, MD of Evolve Lifetime, delves into this emerging trend to bring you up to speed.

Living inheritance ‘gifts’ have two direct benefits. Firstly, they provide an immediate monetary boost for your relatives and, secondly, they are an effective way to reduce the value of your estate, which can help reduce – or avoid – Inheritance Tax.

Whether you are considering making a financial gift to your children – to help them through this uncertain time, for their wedding, university fees, or to help them get on the property ladder, here’s what you need to know about early inheritance.

What are the limits to how much you can give tax-free?

Although there is no limit on how much you can gift your children, when you make the gift can have financial implications.

Money given as early inheritance is known as a potentially exempt transfer (PET). As long as you live for a further seven years, the gift will be exempt from Inheritance Tax. Should you pass away within seven years, your gift is classified as a Chargeable Transfer and may be subject to Inheritance Tax. 

Another thing to consider is that any income generated from your gift might have tax implications for your children, such as Capital Gains Tax.

To help the executor of your estate work out tax liability during probate, the government’s Money and Advice Service recommends recording what you give, who you gave it to, when you gave it, and how much it’s worth.

What about Inheritance Tax?

Inheritance Tax is the tax on someone’s estate after they die. It applies to an estate’s assets – including property, money, and possessions – above £325,000. If the assets are below that amount, there is usually no tax to pay.

Inheritance Tax due on early inheritance gifts is subject to a sliding scale known as ‘taper relief’. This ‘7-year rule’ stipulates that the bigger the gap between making the gift and dying, the smaller the amount of Inheritance Tax due:

  • 7 or more years – 0% Inheritance Tax
  • 6 to 7 years – 8% Inheritance Tax
  • 5 to 6 years – 16% Inheritance Tax
  • 4 to 5 years – 24% Inheritance Tax
  • 3 to 4 years – 32% Inheritance Tax
  • Less than 3 years – 40% Inheritance Tax

The annual ‘gift allowance’

Each tax year, you can give away £3,000 Inheritance Tax-free. Any unused ‘gift allowance’ can be carried forward to the following tax year, but no further.

Any early inheritance gifts above the £3,000 threshold might not be exempt and therefore could be subject to Inheritance Tax.

Other tax-free gifting options

You are entitled to give away up to £250 each year to as many people as you want. These gifts are Inheritance Tax-free. The only caveat is that if you have already given someone your annual ‘gift allowance’ of £3,000, you can’t also gift them a further £250.

Another option is to gift money that you receive from income, such as your pension or earnings. As long as gifting the money doesn’t affect your lifestyle, can you give it to your children Inheritance Tax-free.

For all your Inheritance Tax needs

If you’re looking to help out family members and reduce your Inheritance Tax, early inheritance gifts are a good solution.

For expert advice on planning your estate and family’s financial future please contact Evolve Lifetime

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