My wife and I wish to gift a substantial sum, around £100,000, to each of our two married children. They are 39 and 37 years old with families and both they and their partners work.
Can we do this as a single gift in one tax year without them being liable to pay tax on the money?
Individuals are able to benefit from the nil rate band, which currently stands at £325,000. This means that when they die the first £325,000 of the value of their estate isn’t liable to inheritance tax. Within a married couple each person has their own nil rate band.
Spouses and civil partners are allowed to pass assets to each during their lifetime or when they die with no inheritance tax liability and the survivor of a marriage can benefit from up to 100% of their partner’s nil rate band if it wasn’t used on their death, in addition to their own entitlement.
In addition the residence nil rate band was introduced in April 2017 at a starting rate of £100,000 per person. This will increase to £175,000 by April 2020 and is available for those who pass a residence in which they have lived to a direct descendant such as children or grandchildren. This allowance effectively acts as an increase to the existing nil rate band for inheritance tax purposes.
There are certain gifts that you can make during your lifetime which are not liable to inheritance tax. For example, you can gift up to £3,000 a year and it is immediately exempt from Inheritance Tax, or £6,000 if you did not make a gift of this kind in the previous tax year. A married couple giving for the first time could, therefore, hand over £12,000 to their children in one year. After that, the maximum for a couple is £6,000 each year. So you could benefit from spreading out your gift over more than one tax year if you’re using this exemption.
It is possible to gift amounts in excess of the tax free exemptions, as you are looking to do. These are known as Potentially Exempt Transfers (PET). For these gifts to be free of inheritance tax you need to survive for seven years after making the gift. You can give away most assets, including cash and shares. However, it has to be an outright gift from which you can no longer benefit.
If you die within seven years of making a PET and the total of PETs you make is less than £325,000, then the value gifted will simply reduce your nil rate band on your death. So while this means that those receiving the gifts won’t be liable to tax, it also means that you won’t make any inheritance tax savings by making these gifts.
For those who make total PETs in excess of £325,000, then the amount of inheritance tax payable by those receiving the gift reduces on a sliding scale if death occurs between three and seven years after making the gift.
Patrick Connolly is a certified financial planner at Chase de Vere.