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Families risking inheritance tax gift trap

13 June 2017

  • 47% of parents and grandparents said they did not understand the tax rules around gifting
  • Almost three quarters (73%) admit they find the rules ‘very complicated’
  • 37% would gift a ‘living inheritance’ if tax breaks to boost intergenerational wealth transfers were provided by Government

The Bank of Mum and Dad (and Gran and Grandad) risks falling foul of rules on gifting and inheritance tax, new research1 from leading over 55s retirement specialist Key Retirement shows.
 
Its study shows almost half (47%) of parents and grandparents do not understand the tax rules on gifting, and nearly three out of four (73%) say the rules are very complicated. Key’s research found 38% are not aware their estate might be liable for inheritance tax on gifts to family members.
 
The research, which focusses on the gifting behaviour and plans to gift from the Bank of Mum and Dad, shows 58% want to be able to help children and grandchildren on to the property ladder, which with average house prices at £217,0002 will mean paying out more than £40,000 for a 20% deposit. Around 18% of parents and grandparents would want to help pay off debts and student loans, while 13% would want to fund a wedding for children or grandchildren.
 
New inheritance tax rules introduced last month mean single homeowners have new higher IHT allowances of £425,000, and couples allowances of £850,000, rising in stages to £1 million for couples by 2020/21. However, the higher allowances only apply to family homes and only after death. The allowance otherwise is £325,000 (£750,000 for couples). Any gifts over the value of £3,000 need to be given more than seven years before death or they are potentially liable to 40% inheritance tax, if the threshold has is exceeded. The good news is that for the majority of people gifts should be exempt where wealth is predominantly in the home. However, for those whom this would not be the case there should be greater incentive to gift.

 
 
Years between gift and death Tax payable if gifts over applicable threshold
Less than 3  40%
3 to 4  32%
4 to 5  24%
5 to 6  16%
6 to 7  8%
7 or more  0%
 
 
Key’s Equity Release Market Monitor shows equity release customers are cashing in an average £73,610 tax-free from property wealth, with around 22% of customers using some or all of the cash to help families.
 
Key believes encouraging intergenerational gifting for major purchases through tax breaks could play a major role in tackling intergenerational wealth issues by helping families get on the property ladder or paying off student loan debt. The research revealed that 37% of those questioned would be prepared to gift a ‘living inheritance’ were there tax incentives in doing so.
 
Dean Mirfin, technical director at Key Retirement, said: “At a time when the financial squeeze on younger generations is getting worse it makes sense that grandparents and parents want to help their family now rather than waiting till their death.
 
“But there is real nervousness and confusion when it comes to the awareness around the rules of financial gifting.
 
“We would support tax breaks on gifts and early inheritance in those instances where the incentives can be used for major intergenerational gifts, which have a greater perceived societal benefit. From rising student loans to property prices younger generations need a helping hand more than ever. Early inheritance can have life changing consequences for some families and our study shows that equity release could be a major source for these gifts.”
 
The research found around 67% of parents and grandparents are aware they can release property wealth in order to support children and grandchildren. In the first quarter of 2017 more than one in four (22%) of those releasing equity from their homes did so to provide a gift3.