What’s the most tax-efficient way to gift money to my children?

Hello,

It might seem obvious, but before my clients begin gifting, I always encourage them to carefully review their finances and consider what they may need in the future. It is often wise to overestimate future costs, especially when accounting for long-term care or unexpected expenses. Even a simple cashflow forecast can be incredibly helpful in showing how your finances may evolve under different scenarios.

If you're confident that you have sufficient resources to maintain a comfortable lifestyle throughout your lifetime, gifting to children or family members can be a highly effective way to reduce potential Inheritance Tax (IHT). It is often far more cost-effective than using complex or expensive financial products, and perhaps most importantly, it allows you to witness the benefits your loved ones receive from that support.

Before looking into more complex IHT planning strategies, you could begin by making the most of the following exemptions:

1. Annual Gift Allowance

Each tax year, you can gift up to £3,000 without it counting towards your estate for IHT purposes. If you did not use this allowance in the previous tax year, it can be carried forward once, allowing a gift of up to £6,000 in the current year.

2. Small Gifts Exemption

You may also give up to £250 per person each tax year to as many individuals as you like, provided they have not received part of your £3,000 annual exemption.

3. Wedding Gifts

Wedding gifts offer another useful exemption and can be made in addition to the £3,000 annual allowance. The following limits apply:

• £5,000 to a child

• £2,500 to a grandchild or great-grandchild

• £1,000 to anyone else

4. Gifts from Surplus Income

This is one of the most underused but powerful exemptions. If you have regular surplus income, after covering all usual living expenses, you can make gifts of any size from this surplus. These gifts are immediately exempt from inheritance tax. To qualify:

• The gifts must be made regularly, such as monthly or annually.

• You must be able to demonstrate that they did not reduce your standard of living.

• It is important to keep clear records, ideally with the help of an accountant or financial adviser.

5. Potentially Exempt Transfers (PETs)

Once you have made use of the exemptions above, you might consider larger gifts. These are generally classified as Potentially Exempt Transfers and can come with numerous benefits:

• Reduced Inheritance Tax liability: A PET reduces the size of your taxable estate. If you survive for seven years after making the gift, it is no longer included in your estate, potentially saving your estate up to 40% tax on that amount.

• No immediate tax or reporting: PETs are straightforward compared to some other strategies. There is no need to report them to HMRC unless you die within seven years and your estate exceeds the nil-rate band of £325,000.

• See your kids benefit: You gain the personal reward of helping your children while you are alive, whether the gift supports a house deposit, education costs, or other important life needs.

• Flexibility in planning: PETs do not require trusts or legal structures. They are simple to implement and allow you to keep your estate planning flexible.

6. Planning Beyond PETs

Once PETs have been used appropriately, you may wish to explore other estate planning options, such as trusts or investments that qualify for Business Relief, etc.

Although these strategies are more complex, they can be highly effective, particularly for estates facing a significant IHT liability or where time may be limited due to ill health. Business Relief (BR) qualifying investments, for example, can offer up to 100% IHT relief after just two years, provided the investment is still held at the time of death. A major benefit is that these investments remain in the investor’s name, so they can continue to benefit from them during their lifetime.

Given the complexity and potential high risk of these solutions, it is highly recommended to seek regulated financial advice in this area of estate planning. And BR investments would only be suitable for those who can afford to lose (high capacity for loss) and have a high appetite for risk.

I hope this helps!