Tax-efficient ways to give to loved ones
With house prices increasing, university costs on the rise and even the cost of marriage on the increase, tax adviser Vantis has provided some suggestions for parents and grandparents looking to maximise the amount that can be put aside as a nest egg for relatives.
According to Alan Ford, client partner at Vantis: “It’s difficult for many to now save the capital to build up a substantial nest egg. However, there are some useful tax incentives that can be used to give children and grandchildren a helping hand.”
“We would urge people to use New Year to review their finances and investigate tax efficient methods of passing capital on to the next generation. Professional advice should always be sought in advance.”
Useful tactics include:
Personal allowances
Children have their own personal allowance, which is currently £5,035. Capital gains are tax free for everyone including children if they do not exceed £8,800.
Grandparents should consider building a nest egg for grandchildren by starting a regular savings plan on their behalf. However, income on gifts by parents doing something similar remains taxable on the parents.
Child trust fund
Parents can contribute towards the permitted £1,200 a year investment to a child trust fund account for a child born after 31st August 2002 for whom child benefit is payable. No withdrawals are allowed until the child is 18.
Stakeholder pensions
For the long term, consider starting a stakeholder pension for your child or grandchild. The child cannot access the funds until retirement, but this will provide a good base for their retirement fund. The government will add basic rate tax relief to the amount that you contribute. There are limits to the amount that can be invested - the current limit is £3,600 gross a year, which means a monthly contribution limit of £234 (£2,808) allowing for tax relief.
Holding funds in trust
Grandparents could consider holding funds in bare trust for their grandchildren. This means you retain control over the investment, but pay tax on income earned from it at the child’s rate rather than yours. If this is done, you have total control over when the child gets hold of the money up until the age of 18. And in most cases money you put in trust no longer counts as your estate for inheritance tax purposes.
Professional advice should be sought as to the most appropriate trust for your purposes
Small gifts
In any tax year, an individual may gift up to £250 to any number of donees free of tax. Each grandparent, for example, could give each of their 8 grandchildren £250 annually over a twenty year period. This would dilute their combined estates by £80,000 and secure an Inheritance Tax saving of £32,000 on current rates.
Gifting your annual exemption
In any tax year, an individual can gift up to the annual exemption of £3,000 to individuals or trusts of their choice. Any unused exemption from the previous tax year can be carried forward to the current tax year but no further.
Over a 20 year period, both husband and wife could gift up to £126,000 out of their combined estates tax-free, and achieve a combined potential Inheritance Tax saving of £50,400.
Regular gifts out of income
Those with income in excess of their needs should consider this option. Making regular cash gifts to someone can provide a significant IHT exemption, yet it is possibly the most under-used device by high income earning individuals. The donor must be able to show that the gifts are habitual, are made from post-tax income, and leave the donor with sufficient income following the gift to maintain their usual standard of living. The recipient should always seek advice on how to utilise the funds.
PETS make a great gift
Give someone a PET, and both the donee and your estate could benefit: gifts to individuals qualify as Potentially Exempt Transfers (PETs). As long as the donor survives the gift by seven years, the value of the gift falls outside the donor’s estate for IHT purposes, provided the donor does not retain either a direct or indirect benefit in the assets being gifted.
There is no limit on the amount of the gift allowing individuals to provide a substantial sum for a deposit on a house, for example. Surviving the gift by at least three years should see a measure of Inheritance Tax saving due to the tapering provisions.
Say ‘I do’ to the wedding gift
The UK divorce rate fell by 7% in 2005 and marriage seems as popular as ever – perhaps because of the glittering gift list the couple is able to compile. Subject to certain conditions, each parent can gift £5,000 to their child on the occasion of their marriage (known as ‘gifts in consideration of marriage’). Grandparents or more distant relatives can gift £2,500 and any other person £1,000 free of tax.
Passing wealth to your spouse
Married couples and civil partners can take advantage of the exemption for transfers between spouses whether made during their lifetime or on death. It is not uncommon for one spouse to hold all – or a majority – of the wealth in their name and couples in this situation should ensure that assets to the value of the IHT nil rate limit (currently £285,000) are transferred to ensure that the amount of IHT payable on the death of the surviving spouse is minimised. Similarly IHT inefficient Wills could exacerbate the liability on the death of the surviving spouse by £114,000 at current rates and couples should have these health checked as a matter of course.
Alternative Investment Market (AIM) shares
Consider creating a portfolio of AIM shares to pass onto relatives. AIM shares can qualify for exemption from IHT after being held for 2 years so could be passed by will (or into trusts). There are investment management companies that can provide specialist AIM portfolios and specialist advice should always be sought.
With house prices increasing, university costs on the rise and even the cost of marriage on the increase, tax adviser Vantis has provided some suggestions for parents and grandparents looking to maximise the amount that can be put aside as a nest egg for relatives.
According to Alan Ford, client partner at Vantis: “It’s difficult for many to now save the capital to build up a substantial nest egg. However, there are some useful tax incentives that can be used to give children and grandchildren a helping hand.”
“We would urge people to use New Year to review their finances and investigate tax efficient methods of passing capital on to the next generation. Professional advice should always be sought in advance.”
Useful tactics include:
Personal allowances
Children have their own personal allowance, which is currently £5,035. Capital gains are tax free for everyone including children if they do not exceed £8,800.
Grandparents should consider building a nest egg for grandchildren by starting a regular savings plan on their behalf. However, income on gifts by parents doing something similar remains taxable on the parents.
Child trust fund
Parents can contribute towards the permitted £1,200 a year investment to a child trust fund account for a child born after 31st August 2002 for whom child benefit is payable. No withdrawals are allowed until the child is 18.
Stakeholder pensions
For the long term, consider starting a stakeholder pension for your child or grandchild. The child cannot access the funds until retirement, but this will provide a good base for their retirement fund. The government will add basic rate tax relief to the amount that you contribute. There are limits to the amount that can be invested - the current limit is £3,600 gross a year, which means a monthly contribution limit of £234 (£2,808) allowing for tax relief.
Holding funds in trust
Grandparents could consider holding funds in bare trust for their grandchildren. This means you retain control over the investment, but pay tax on income earned from it at the child’s rate rather than yours. If this is done, you have total control over when the child gets hold of the money up until the age of 18. And in most cases money you put in trust no longer counts as your estate for inheritance tax purposes.
Professional advice should be sought as to the most appropriate trust for your purposes
Small gifts
In any tax year, an individual may gift up to £250 to any number of donees free of tax. Each grandparent, for example, could give each of their 8 grandchildren £250 annually over a twenty year period. This would dilute their combined estates by £80,000 and secure an Inheritance Tax saving of £32,000 on current rates.
Gifting your annual exemption
In any tax year, an individual can gift up to the annual exemption of £3,000 to individuals or trusts of their choice. Any unused exemption from the previous tax year can be carried forward to the current tax year but no further.
Over a 20 year period, both husband and wife could gift up to £126,000 out of their combined estates tax-free, and achieve a combined potential Inheritance Tax saving of £50,400.
Regular gifts out of income
Those with income in excess of their needs should consider this option. Making regular cash gifts to someone can provide a significant IHT exemption, yet it is possibly the most under-used device by high income earning individuals. The donor must be able to show that the gifts are habitual, are made from post-tax income, and leave the donor with sufficient income following the gift to maintain their usual standard of living. The recipient should always seek advice on how to utilise the funds.
PETS make a great gift
Give someone a PET, and both the donee and your estate could benefit: gifts to individuals qualify as Potentially Exempt Transfers (PETs). As long as the donor survives the gift by seven years, the value of the gift falls outside the donor’s estate for IHT purposes, provided the donor does not retain either a direct or indirect benefit in the assets being gifted.
There is no limit on the amount of the gift allowing individuals to provide a substantial sum for a deposit on a house, for example. Surviving the gift by at least three years should see a measure of Inheritance Tax saving due to the tapering provisions.
Say ‘I do’ to the wedding gift
The UK divorce rate fell by 7% in 2005 and marriage seems as popular as ever – perhaps because of the glittering gift list the couple is able to compile. Subject to certain conditions, each parent can gift £5,000 to their child on the occasion of their marriage (known as ‘gifts in consideration of marriage’). Grandparents or more distant relatives can gift £2,500 and any other person £1,000 free of tax.
Passing wealth to your spouse
Married couples and civil partners can take advantage of the exemption for transfers between spouses whether made during their lifetime or on death. It is not uncommon for one spouse to hold all – or a majority – of the wealth in their name and couples in this situation should ensure that assets to the value of the IHT nil rate limit (currently £285,000) are transferred to ensure that the amount of IHT payable on the death of the surviving spouse is minimised. Similarly IHT inefficient Wills could exacerbate the liability on the death of the surviving spouse by £114,000 at current rates and couples should have these health checked as a matter of course.
Alternative Investment Market (AIM) shares
Consider creating a portfolio of AIM shares to pass onto relatives. AIM shares can qualify for exemption from IHT after being held for 2 years so could be passed by will (or into trusts). There are investment management companies that can provide specialist AIM portfolios and specialist advice should always be sought.
posted by tony at 5:17 PM
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