How can I give my son a tax-free gift of £50,000 towards his first home?

admin
10 November 2015

Q

My son would like to buy his first home. I would like to give him £50,000 to help with the deposit.This is far in excess of what the taxman will let me give him tax-free. Could you suggest the most cost-effective way to give him the money?I don’t particularly relish the idea of paying tax on this gift but would prefer to be responsible for any payment due rather than have it fall upon my son.
From
SW/Bristol

A

You don’t need to pay inheritance tax on up to £3,000 worth of gifts each tax year. This is called the ‘annual exemption’. Any left-over annual exemption can be carried over from one tax year to the next but the maximum exemption is £6,000.

On top of this, certain gifts don’t count towards the annual exemption and no inheritance tax is due on them. For example, you could give your son £5,000 tax-free if he was planning to get married. So if you spread your gifts to him over a period of five years and use the annual exemption, and he gets married in this time you could give him £23,000 without having to pay any inheritance tax.

Another possible option is to spread the payments over a number of years so you can argue that the amount you give him is your normal expenditure. There is no inheritance tax levied on regular payments provided they form part of your normal expenditure pattern; are made out of income and not savings or capital; and having made the payment you are left with enough to maintain your normal standard of living. Clearly, a one- off payment would not constitute a regular expenditure pattern but 10 payments might.

One would need to be careful, however, that you aren’t transferring capital assets over a period of time and that you can genuinely make the payment out of income.Typical sources of income derive from employment and self-employment, rents from property, pensions, interest and dividends.

If you can’t give your son the money via one of the methods above, then it will count as a potentially exempt transfer. That is, you don’t pay inheritance tax when you make the gift but your estate might have to when you die.

After your death, there will be inheritance tax to pay up to a maximum of 40% on the value of any gifts made in the seven years before your death, together with the value of your estate less the nil-rate band of £325,000. This is normally paid out of your estate, meaning your son wouldn’t be expected to foot the bill.

 

David Wesley-Yates is a chartered tax adviser at Red & Black Accountancy.