Younger family members are increasingly supported by generous grandparents, but intergenerational gifting needs to take potential benefits, and pitfalls, into account.
A third of millennial homeowners have received financial help from their grandparents of an average £7,400, according to a survey from mortgage brokers Trussle. Meanwhile, research by equity release provider Key found that 15% of grandparents had contributed towards their grandchildren’s higher education, with another 20% planning to do so over the next decade.
For the younger generation, steep education and housing costs mean these gifts can help them reduce debt and qualify for a mortgage. But there may also be tax advantages for grandparents from these generous intergenerational arrangements.
If you have more substantial assets, you may wish to mitigate your future inheritance tax (IHT) bills. Estates worth more than £325,000 are taxed at 40%, although married couples (and civil partners) can pass on £325,000 each to the surviving partner, tax free, with possible additional allowances for the family home.
After the rapid increase in property values in recent decades, many families may be looking to reduce any IHT liability. Giving away assets to family members while you are still living can be an effective way to do this.
There are various rules to consider. The simplest option is to make gifts from regular income, or to limit them to a maximum of £3,000 a year per donor. These will be disregarded by HMRC when it comes to calculating future IHT.
If you are thinking of giving away larger amounts, you would have to live for a further seven years for your gifts to escape the IHT net. This rule is to stop people simply giving away assets on their deathbed to avoid paying tax. If you were unfortunate enough to die within seven years of making a large gift, its full value will be included in your taxable estate. There is a taper relief that may reduce any tax payable on the gift, were you to die between three and seven years of making it.
Before you decide to make any substantial gifts, however, you need to make sure that your own financial future is secure. People are generally living longer and you may need additional finances later in life to help pay for care. To avoid future family arguments, it’s best to be clear about what you are giving and why, and how any gifts might impact on future legacies. Estate and IHT planning can be complicated, so it is best to seek specialist advice.
Levels and bases of taxation and tax reliefs are subject to change and their value depends on individual circumstances.
The Financial Conduct Authority does not regulate tax advice. Tax laws can change.