Taxes And Gifting To Children

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Taxes And Gifting To Children

Last Updated Oct 6, 2008 08:09 PM

Different tax rules apply to money and property that is gifted to children, depending on its value and the way it is given.

When you have to pay inheritance tax
The inheritance tax threshold is currently £263,000. This means that if you leave assets (money or property) worth more than this amount to your children when you die, they will have to pay 40% inheritance tax on everything above £263,000.

Rules on gifting to children
You can make ‘gifts’ of assets (eg, money, your house) which are legally exempt from tax. The person giving away the assets is known as the ‘donor’. The person receiving the gift is known as the ‘donee’.

You cannot simply give your house to your children by putting their name on the deeds, in order to avoid inheritance tax. In financial terms, this is known as a ‘gift with reservation’. If, however, you pay the correct market rent to the new owner (eg, your child), it becomes an ‘outright gift’ and is potentially exempt from inheritance tax. You need to survive seven years after ‘gifting’ the assets to ensure they are exempt from tax.

What tax-exempt gifts include

maintenance payments for children (including adopted and step-children) who are under 18 or in full-time education
wedding gifts to children of up to £5,000
gifts worth not more than £3,000 in any tax year
(A tax year runs from 6 April in one year to 5 April the following year.) If the total value of gifts in one year is less than £3,000, any surplus can be carried forward to the next tax year but no further.

You should also keep in mind that special tax rules apply to interest earned on money given by parents to their children.

Special tax rules for gifts from parents

Further information
It’s important to seek advice from the Inland Revenue or a qualified accountant. You can find out more on the IHT section of the Inland Revenue website.

Inheritance Tax Helpline 0845 3020 900 – advisers deal with enquiries of genuine uncertainty about the law but cannot comment on tax planning or advise about transactions that are designed to avoid or reduce tax.

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