Parents acting as ‘Bank of Mum and Dad’ reminded not to forget about IHT

Parents who gift money to their children or grandchildren in a bid to help them get on the property ladder are being reminded to consider the complex Inheritance Tax (IHT) rules affecting gifts.

The warning comes after research found that the so-called ‘Bank of Mum and Dad’ has gifted an estimated £5.7 billion to young Britons this year to help out with the likes of mortgage deposits and moving costs.

With property prices growing increasingly out of reach for first-time buyers, it makes sense that parents would want to help their children get a foot on the property ladder. However, concerns have been raised about the sheer amount of money parents are gifting – and that families might not be aware of how such gifts will be affected by IHT.

The IHT implications of gifting money are typically dependent on factors such as:

  • The amount of money gifted.
  • Who the money is gifted to.
  • The reasons behind the gift.

Under existing IHT rules, an individual can gift up to £3,000 a year free of IHT. However, this tax-free amount increases to £6,000 if no gift was made during the previous financial year.

This effectively means that a married couple gifting to their children or grandchildren for the first time can donate a maximum of £12,000 in the first year tax-free, followed by £6,000 the following year.

Any gifts that breach the tax-free threshold will be deemed ‘potentially exempt transfers’ – which means that they could be at risk of falling foul of the so-called ‘seven year rule’.

This rule sees that any ‘potentially exempt transfers’ will only be IHT-free if the donor lives for seven years or more after gifting the money.

The rules surrounding IHT and gifting are complex and confusing, which is why families should always seek specialist advice.