Parents giving away £227 billion to kids to save on inheritance tax

8 October 2018

One in five parents has given money to their children in an attempt to reduce the amount of inheritance tax their families will have to pay when they die.

A total of £227 billion has been transferred, with the average value of assets given away £32,920, according to research from Direct Line . A further 19% have not given their children any money yet, but plan to do so in the future.

Inheritance tax is currently charged at 40% on estates worth more than £325,000. However, transfers between spouses are tax free and if you are passing on a home you can boost your total allowance by a further £125,000 (rising incrementally to £175,000 in 2020/21), following the introduction of a new residential nil-rate band.

However, despite this new measure inheritance tax revenue is continuing to increase, breaching the £5 billion barrier for the first time in the last tax year.

Among parents who hadn’t given their children an early inheritance, 34% say they did not have the assets to give away, one in 10 says their children are too young while 13% are worried they will need the money themselves when they are older.

Some divorcees are being particularly pro-active with their inheritance tax planning, with one in seven having already given their children money to prevent it going to a new partner when they die. A further 37% of divorcees plan to give their children money but only if they remarry.

When giving away money, it is vital parents are aware of the tax implications. Although some monetary gifts can be given tax free (everyone has a £3,000 a year annual gifting allowance, while some wedding gifts can also be made IHT free) others will be treated as ‘potentially exempt transfers’ – this means they only become totally tax free if the person making the gift lives for seven years after the gift is made.

Jane Morgan, business manager at Direct Line Life Insurance, comments: “Worrying about what happens to your children when you’re no longer around is natural for any parent and it is understandable that people want to maximise the money they leave behind. However, it is important that people planning to transfer money understand the tax implications that a gift might give rise to.”

Philip Munro, partner at law firm Withers LLP, adds: "Lifetime gifting is a strategy that can be used to reduce a future potential inheritance liability and will appeal to many parents who want to provide for their children, particularly as they may be struggling to access the current housing market. However, there can be inheritance and capital gains tax implications in the making of gifts, so parents should consider taking tax advice.”


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