Katie Coates provides an overview of the gifting allowances for Inheritance Tax which grandparents (and other individuals) can utilise to make smaller gifts and which will not have an impact on their Nil Rate Band (the Inheritance Tax free allowance at date of death).
With an accumulation of income and assets over the years, and generally decreasing outgoing expenditure, Grandparents can often find themselves in a privileged position where they can afford to provide some financial support to the lower branches of their family tree.
The ability to gift some of their wealth to their families during their lifetime can be beneficial to both grandparents and their families. With Grandparent’s Day this Sunday, 4 October 2020 we thought it would be useful to provide some guidance on the gifting options available to grandparents.
There are a number of gifting allowances for Inheritance Tax which grandparents (and other individuals) can utilise to make smaller gifts and which will not have an impact on their Nil Rate Band (the Inheritance Tax free allowance at date of death). These can be used in any tax year and renew on 6 April of each year. These are as follows:
The small gifts exemption – This allows a person to give up to £250 per year to as many individuals that they wish. As long as the total gifts given to each individual does not exceed £250 then they will be exempt from Inheritance Tax.
Annual Personal Gifting Allowance – Every person has an annual tax free gifting allowance of £3,000. A person may therefore give up to £3,000 each year between as many people as they choose and this will be exempt from Inheritance Tax. However, this cannot be used on the same people who have received a small gift in terms of point 1 above. If a person has received more than the £250 small gift limit then this will be deducted from the £3,000 annual allowance instead and can no longer be considered a small gift.
- There is also a specific gifting exemption for grandparents which enables them to gift up to £2,500 per grandchild as a marriage gift at the time of each grandchild’s wedding.
- The guidance above relates to smaller and possibly one-off gifts being made by grandparents. There are however circumstances where a grandparent may wish to make regular payments to their family or grandchildren. Where a grandparent has surplus disposable income each year, and they gift this in a regular established pattern, all of these gifts from income will qualify for an exemption for Inheritance Tax. It is vital that the gifts are made out of disposable surplus income only, and in an established pattern for the gifts to qualify for the exemption. For grandparents, this could mean using surplus annual income for the payment of regular education or care fees for grandchildren.
Finally, a grandparent can choose to make a large lump sum gift of any amount from their capital at any time. A gift of this nature however would not qualify for any exemptions and would decrease their Nil Rate Band if they were to die within 7 years and the gift would still be considered part of their estate for an Inheritance Tax calculation. If they survive seven years from the date of this gift then then the value would pass out of their estate successfully and would no longer reduce their Nil Rate Band on death.
How can we help?
We can provide professional advice and create a bespoke tax planning report for you, including gifting options, if you would like to consider making gifts to your family, grandchildren or other individuals at this time.
If you wish to discuss this further, please do not hesitate to contact our experienced Wills, Estates and Succession Planning Team, who would be delighted to assist you.