Lilly Whale: “The best way for many grandparents is to simply give money during their lifetime; if they survive such gifts by seven years, the value of their estate falls off. Otherwise, the gifts will become chargeable and use all or part of their zero rate (£ 325,000). “
Lilly Whale is exploring opportunities for grandparents looking to help their grandchildren financially in the most tax-efficient way …
With the gap between the older generation living longer and the younger generation becoming increasingly difficult to fund major life events, it’s no wonder grandparents often skip their Generation X children to pass their fortunes to their Generation Y grandchildren / Pass Z?
Gen-X just can’t always help with tuition fees or a first home security deposit these days, while grandparents often can.
On the subject of matching items
Despite the change in today’s monetary habits, the right to donate has unfortunately remained stubborn – at least from an inheritance tax point of view. However, a healthy mix of foresight and creativity can ensure that wealth is inherited without incurring colossal inheritance taxes (IHT) during both lifetime and death.
My present for you
The best practice for many grandparents is to simply give away money while they are alive; if they survive these donations by seven years, the value falls from their estate. Otherwise, the gifts will become chargeable and will use up all or part of their zero rate (£ 325,000).
For example, suppose that on May 1, 2021, Ms. Jones gave each of her twin grandchildren two gifts of £ 162,500 on her 16th birthday. Unfortunately she died on June 1st of this year. Mrs. Jones had already given her godson £ 3,000 that year, so her annual capital exemption of £ 3,000 had been used up; accordingly, the two gifts came back into their possession and erased their available zero rate band. Your entire estate was therefore taxed at 40% and could not benefit from the £ 325,000 tax-free threshold.
Instead, say that Ms. Jones made the same gift on May 1, 2014 and survived. May 2021, the seven years passed and the £ 325,000 went out of her estate without IHT consequences. She would again be free to give away any amount of money and trigger a new seven-year period.
If the donor can afford it, the earliest possible donation should help to reduce the risk that the donation will not return to the estate after seven years.
In both cases, however, the twins are clearly very young and one can understandably hesitate to give away such large sums of money when the funds are not provided.
At your discretion
An alternative could be for Ms. Jones to deposit the funds into a discretionary trust so that access is controlled by one or more trustees (e.g., the parents of the twins) who can pay out capital to their grandchildren as needed.
Discretionary trusts have their own rules and fees; If a transfer to a trust fund made in a rolling seven-year period exceeds the zero rate band, an IHT entry fee of 20% is levied on the excess above the available zero rate band. This would clearly not be the case here if Ms. Jones deposited £ 325,000 in escrow, but if the initial payment were of greater value. In addition, during the existence of the trust, fees are charged for every ten-year anniversary and for the distribution of assets to the beneficiaries. Any grandparent considering this avenue would be well advised to speak with their financial advisor to ensure that a discretionary trust is a viable option.
Grandparents should also be aware that donating to a discretionary trust for capital gains tax (CGT) purposes is considered a disposal. This does not apply to Ms. Jones when giving cash as there is no profit; However, if she was holding real estate in trust, a CGT liability could exist if the value of the property has increased since it was first acquired. Again, a financial advisor can help investigate these nuances.
Grandparents can also do IHT planning exercises on a much smaller scale, and there are other (though perhaps less effective) ways to pass on their assets without triggering IHT commitments. For example:
- Grandparents wishing to cover the cost of music or driving lessons can give up to £ 250 tax free to a single recipient – but note that the recipient may not have benefited from the £ 3,000 annual exemption.
- Grandparents can help pay their pocket money by giving away cash from their excess. If they can demonstrate (at HMRC’s request) that the gifts are regular (monthly, quarterly, etc.) and in no way detrimental to their standard of living, no IHT fee will be charged.
- For anyone whose grandchild is getting married, the grandparents can give the happy couple up to £ 2,500 tax-free as a wedding gift.
An overarching question that grandparents could of course ask themselves before giving a gift is of course how old their grandchildren are and whether it makes sense to hand over large amounts of money, taking into account their financial competence. Careful planning should ensure gifts aren’t wasted too soon or don’t lead to greater IHT liability across the board.
Lilly Whale is an associate on the private clients team at Goodman Derrick law firm