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How can I gift money without paying inheritance tax?

inheritance tax

If you’d like your children to inherit some of your wealth, then you may be faced with the penalty of inheritance tax, however if you are savvy, there are ways around it. Here we take a look a six possible ways to gift money without being hit by inheritance tax.

1) Put the money into a trust

Using a trust can be a useful way of gifting money without it being subject to inheritance tax. Basically, putting it into trust means that the money no longer belongs to you – and although it is for the benefit of your beneficiary, it is currently being looked after by a third party (the trustee) until such time the beneficiary is entitled to access it.

There are different types of trusts and these can be quite complicated, so it is certainly worth seeking some independent advice before choosing this route.

2) Use your gift allowance

Gifting money to your children or grandchildren is a useful way of reducing your inheritance tax bill, but you’ll need to know your limits. Every person has an annual gift allowance, which sets out how much money you are allowed to give away without being chased down by the taxman.

The annual limit for gifts is a flat rate of £3,000, however this can be carried over to the following year if you don’t use it, to a maximum of £6,000.

In addition to this, you can also make unlimited ‘small’ gifts to people of up to £250 a time.

3) Contribute to a wedding

Weddings can be expensive so parents often contribute cash to their children but if you’re wanting to avoid the taxman taking a slice then you’re limited to £5,000 for each child. If you’re a grandparent you can donate £2,500 without paying inheritance tax and for anyone else, the limit is £1,000.

4) Inheritance tax exempt transfers

If you would like to make a more significant financial gift to your child then this could still be possible under what is known as ‘potentially exempt transfers’.

However, there is a catch. These payments are only exempt if you live for more than seven years after the money has been gifted. If you die before this period, then your beneficiaries will be faced with inheritance tax.

5) Offer your children a loan

Helping your children out financially doesn’t always have to be in the form of a gift, you may choose to simply lend them the money, with agreement that they will pay you back in full at a later date.
Loans to children can often be hard to prove, so it’s useful to have an agreement drawn up in writing which both parties sign.

5) Pay off debts

A relatively safe way to offer financial help to your children without having to worry about inheritance tax is to pay off their debts. This is often a good alternative to a financial gift if you are worried that your children may be irresponsible with the money that you give them!

6) Become a guarantor

With house prices increasingly becoming less and less affordable for young people, the bank of mum and dad may come in very handy for any children wishing to purchase a property.

If you are worried that a significant gift may leave you in line for inheritance tax, another option is to be a guarantor on their mortgage.

If you are in a strong financial position, your child is more likely to get a better deal on a loan, however do remember that if they fall behind on their repayments, you may be liable.

Speak to an adviser today for more information on helping out your child with a guarantor mortgage

The above post does not constitute advice – financial, legal or otherwise. The information within this article is the author’s own opinion and do not necessarily reflect the views of SO Media or So Smart Money.


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