In this article, Louisa France, a financial planning partner from our Leeds office, and Jocelyn Davis, an estate planning specialist from our Bracknell office, give their opinions on making financial gifts.
Q: As a result of the coronavirus pandemic, my grandson has lost his income. He lives in rented accommodation and I would like to help pay towards his rent and living costs at this difficult time. What would be the best way for me to do this and are there any tax implications I should think about?
Louisa France, Financial Planner
There are a number of ways you can help your grandson, but the best approach depends on how much money he needs, your own financial and tax position, and any previous financial gifts you might have made.
Every year, you have an allowance of £3,000 for making gifts, known as your annual exemption. This means that any gifts totalling this amount will automatically fall outside your estate for Inheritance Tax purposes.
You can gift the money as a lump sum or split it into smaller amounts, which you could pay out on a regular basis if you wish. If you didn’t use this allowance during the previous tax year, you can carry it over, making your annual exemption limit potentially as much as £6,000.
Alternatively, if you have any excess income that you do not spend each year, you could make regular payments to him. These payments will be exempt from Inheritance Tax as long as it can be proved that those payments do not affect your lifestyle and that they come from unused income. This unused income can include dividends and interest on investments, as well as pensions and employment income.
If you have a flexible money purchase pension (also known as a defined contribution pension) that you are not drawing on, you could consider increasing your income by drawing down from it temporarily. This option would not normally be the first port of call if other income is available due to the fact that you may be subject to Income Tax on at least part of the pension withdrawal, and pensions are normally Inheritance Tax efficient if left invested. If you were to proceed with this option, careful planning and advice would be required.
Jocelyn Davis, Estate Planning Specialist
Paying towards your grandson’s monthly rent and living costs is a really practical and generous way to help him. Before making any payments, however, you’ll firstly need to find out exactly what his rental and living costs are and how much money he needs to help cover them. Secondly, you need to work out how much you can afford and wish to gift.
Next, you should consider where the money is to be taken from. As markets have recently seen large falls, you may wish to fund any gifts from cash or income rather than investments while still taking into account your own requirements. However, this approach requires careful planning and professional financial planning advice is highly recommended.
A lump sum payment in excess of your £3,000 annual allowance, which Louisa has outlined above, could be classed as a potentially exempt transfer for Inheritance Tax purposes if you survive for seven years after making the gift. In this instance though, where it seems that your grandson’s financial situation is likely to be temporary, making smaller regular payments may be more appropriate than a lump sum gift.
You may want to think about setting up a standing order on a monthly basis which will establish a regular pattern of gifting and receiving. Given the uncertainty over how long he will be in this situation and how long it will take him to financially recover, it might be difficult to decide how long you want to make these payments for. That being said, there are benefits to everyone involved when regular financial gifts are made.
Regular gifting can help with your own Inheritance Tax planning. There is an Inheritance Tax exemption available if you make affordable gifts out of income on a regular basis, which has no upper limit. To be able to claim this ‘gifts from normal expenditure’ exemption, three key areas must be met:
The gifts must be regular. Setting up a monthly, quarterly or annual standing order to make gifts will establish regularity
Gifts must come from income and not capital. For example, from bank interest, income from investments or pension income
These gifts must not reduce your own standard of living. Using cashflow modelling will show if you have excess income after expenditure along with how much is comfortably available to gift both now and going forward
Speak to Evelyn Partners
If you would like to know more about making financial gifts, we’re here to help. You can book a free initial consultation or call us 020 7189 2400 if you have any further questions or would like more information.
This article is solely for information purposes and is not intended to be, and should not be construed as financial advice. Whilst considerable care has been taken to ensure the information contained within this commentary is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.
Examples of how tax or tax relief may apply are based on our understanding of current tax legislation. Whether any tax will be payable, at what level it is charged and whether you qualify for tax relief will depend upon individual circumstances and may be subject to change in the future.
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This article was previously published on Tilney prior to the launch of Evelyn Partners.