Can I help my children through the cost-of-living crisis and save on Inheritance Tax too?

With continued media speculation about families unable to afford to pay energy bills, and CPIH inflation - at the time of writing - at 6.3%, you may be considering that now could be the time to step in to help your offspring.

Gifting your children or grandchildren money while you are alive could be a tax-efficient way to be the “Bank of Mum and Dad” during the cost-of-living crisis and could mean that you help your children now when they need it most.

Financially supporting your adult children and grandchildren

Traditionally, wealth is typically inherited by family members after a loved one has passed away, with the most effective method of making sure your wealth is passed to those intended (your beneficiaries), by having written a will where your wishes are conveyed.

Inheriting on death, by which time your children might be in their 50s or 60s, might help during their retirement, but more important milestones – such as buying a first home or starting a family – occur much earlier in life.

In the current cost-of-living crisis, you may wish to consider gifting a living inheritance instead. Not only will this help your children and grandchildren at a time when they need it, but it could ultimately reduce your Inheritance Tax (IHT) liability.

What are the benefits of gifting a living inheritance?

When a person dies, the value of their property, savings and other assets is calculated, with a deduction made to account for debts and funeral expenses. This is known as the estate value and will dictate whether any Inheritance Tax must be paid before being distributed to beneficiaries.

Therefore, reducing the value of your estate before you die – by gifting assets while you are still living – may help mitigate the amount of IHT that is due after you die.

These are some of the options that may allow you to help your family whilst also saving on IHT:

1. Making gifts while you are alive lowers the value of your estate for IHT purposes

IHT is payable at 40% on any wealth above a certain threshold, known as the “nil-rate band”, which is currently £325,000 per person. If you plan to pass on your home to a child, grandchild or lineal descendant, you can make use of the residence nil-rate band (currently £175,000 per person).

Therefore, if your estate is worth less than these amounts, subject to point two, your estate should have no IHT to pay.

2. You can gift any amount you like during your lifetime

Any gifts you make, are only factored into the final IHT calculation following your death, if you die within seven years of making them.This is known as the “seven-year rule”. If you die between three and seven years after making the gift, the rate payable will be based on a sliding scale known as “taper relief”.

3. Tax free exemptions for some types of gifting

There are some HMRC exemptions to giving gifts that are IHT-free, regardless of how long you survive after gifting. These include:

Annual Exemption - allows you to gift £3,000 a year tax-free, with the option to carry forward any unused amount for up to one year.

Normal expenditure out of income exemption - allows you to make regular gifts as long as they are made from income and don’t affect your standard of living.

Personal benefits to gifting now rather than after death

One of the main benefits to gifting a living inheritance, is that you are still around to see the difference your money makes, and that you are able to provide financial support at a time when your family need it most.

IHT planning is a complicated area, so we recommend you seek professional financial and tax planning advice regarding the most appropriate steps to take for you and your family.