5 important things to remember if you plan to gift money to your family

one person handing a wrapped gift to another

If your loved ones are struggling during the cost of living crisis, they are not alone. Perhaps you have children whose rent or mortgage has risen substantially and are finding it hard to get by? Or maybe you have older parents who are also having difficulty paying soaring energy bills?

A recent report in FTAdviser revealed that 1 in 5 investors said they plan to use money from their investments to help family members battle the rising cost of living, particularly to provide assistance to cover mortgage payments and household bills.

Making gifts can be of huge benefit to your family – and it could also help you to mitigate any Inheritance Tax (IHT) due on your estate when you pass away.

Read on for five important factors to consider if you’re thinking about making gifts to a loved one.

1. Gifting can help you to mitigate an Inheritance Tax (IHT) bill

Inheritance Tax (IHT) is ordinarily charged on the value of your estate when you die. Each individual benefits from a “nil-rate band” of £325,000, meaning you usually won’t be liable for IHT if the value of your estate is below this amount.

You may also benefit from an additional “residence nil-rate band” of £175,000 if you plan to leave your home to children or grandchildren.

And, as you can transfer any unused IHT nil-rate band between spouses or civil partners, you may be able to pass up to £1 million without any IHT being due.

Considering rising property prices and assert values, more and more people are finding their estate is likely to be liable to IHT. Indeed, IFA magazine reports that IHT receipts hit a record £7.1 billion between April 2022 and March 2023 – that’s £1 billion more than the same period a year earlier.

Making gifts to loved ones can have the effect of reducing the value of your estate for IHT purposes. So, helping out family during the cost of living crisis could have dual benefits – supporting them when they need it and potentially reducing the amount of tax due when you die.

2. Your gift may still be subject to IHT if you die within 7 years

It’s important to remember that many gifts won’t immediately fall outside your estate for IHT purposes.

While there are some exemptions and allowances (see below), many gifts will only fall outside the value of your estate seven years after you make them.

When you make a gift, it becomes a “potentially exempt transfer” (PET). If you survive for seven years after you make the gift, no IHT will be due on its value. However, if you die within this period, the value of the gift could still be included in IHT calculations.

If you die within four to seven years after making the gift, a reduced rate of IHT may be payable on the value.

This is a complex area, so seeking advice can be beneficial.

3. Use your gifting allowances and exemptions

Each individual can make certain gifts, and these will immediately fall outside your estate. Common allowances and exemptions include:

  • The annual exemption – you can gift up to £3,000 each year. You can carry forward any unused allowance for one year
  • The “small gifts” exemption – you can make unlimited gifts of up to £250 to different people
  • Gifts on the event of a wedding – you can gift £5,000 to a child, £2,500 to a grandchild or great-grandchild, or £1,000 to anyone else.

Using these exemptions regularly can help you to reduce the value of your estate immediately.

4. Gifting from income can be a great way to support family

Another strategy you can use to support a loved one while also reducing your IHT liability is to make gifts from your income.

You can make unlimited regular payments to help with another person’s living costs provided that:

  • You can afford the payments after meeting your usual living costs
  • You make the payments from your regular monthly income, not from capital
  • The payments are regular in nature.

So, for example, you may pay rent for your child, pay into a savings account for a child under 18, or give financial support to an elderly relative.

If you intend using this strategy, it’s important to keep clear and detailed notes of all gifts.

5. Can you afford a gift?

If you’re thinking of making a gift to a loved one, it’s important to think about the impact this may have on your own financial plan and goals.

Gifting now may help someone else, but it might mean that you don’t have sufficient resources to maintain your desired standard of living in retirement. You may then have to make compromises or accept a different retirement to the one you’d hoped for.

Speaking to a financial planner can be instructive here. We can use sophisticated cashflow modelling to consider the effect that a cash gift might have on your current and future financial situation. You can see in black and white whether you can afford to make the gift and can make an informed decision knowing the likely impact on your future security.

Get in touch

If you’re thinking of making a gift, or you’re concerned about your potential IHT liability, get in touch for advice. Email info@blueskyifas.co.uk or call us on 01189 876655.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.