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Retirees hand out £4,000 a year to family: what’s the smartest way to give?

Retirees giving up to £4,300 a year to loved ones

Retirees hand out £4,000 a year to family: what’s the smartest way to give?

People planning to retire this year are handing out as much as £360 a month to help out their family, according to insurance company Prudential. So, what are the tax-savvy ways to give to give to your loved ones?

Prudential found that prospective retirees are ‘providing financial support to three people, with their or their partner’s children the most likely to be receiving money’. One in four are giving money to grandchildren, too.

If you’re one of the growing group of people giving money to your family, it pays to be smart about how you help out financially – otherwise there’s potential to leave your family with a large tax bill.

Here, Which? explains how gifting for inheritance tax purposes works, and how much you can give away tax-free.

What is inheritance tax?

Inheritance tax is charged on your estate – the value of the savings, investments, property and other belongings. The charge is currently 40%.

Your heirs won’t pay this amount of everything. Each individual gets an inheritance tax allowance – called the ‘nil-rate band’ – of £325,000.

If your estate includes a property, and you’re passing it onto a direct descendant (find out more in our guide to inheritance tax on property), you get an additional £125,000 added to your nil-rate band, meaning you can pass on £450,000 in the 2018/19 tax year free of inheritance tax.

There are special rules for married couples and civil partners. They can inherit their partner’s estate tax-free and their unused nil-rate band. This means a married couple can pass on a total of £900,000 this tax year.

Tax-free gifts

You can give up to £3,000 in total in each tax year that you’re alive. You can carry any unused part forward one year only to the next year (so a total of £6,000). This gift is technically called your ‘annual exemption’.

You can also give any number of gifts up to £250 to a single recipient but not to anyone who has already benefited from your annual exemption.

There are other exemptions. For example, if you want to give money for a wedding, these aren’t subject to inheritance tax, provided the gifts are made before the wedding, and the wedding does go ahead.

Each parent of the couple can give up to £5,000. Each grandparent can give up to £2,500, as can the bride and groom. Anyone else can give gifts of up to £1,000.

Inheritance tax isn’t due on gifts to charity, museums and a whole host of other organisations (see the list in this guide).

Gifts out of income

Gifts considered to be part of your ‘normal expenditure’ are also tax-free. This means you can give money from your salary or pension and it won’t count towards your inheritance tax.

This doesn’t mean that you can give away all of your money as a tactic to avoid inheritance tax. HMRC has strict rules to ensure that you can genuinely afford to give money away from your income, and will often ask for proof of this.

A regular pattern of giving has to be demonstrated for it to avoid inheritance tax, usually over a period of three years.

If any relatives are currently dependent on you for maintenance because of old age or infirmity, these gifts are also tax-free. This would also include an ex-husband, ex-wife, or ex-civil partner.

It also includes leaving gifts for the maintenance, education or training of your children aged 18 or under (including step and adopted children).

Potentially tax-free gifts

Any other gifts you make are are classified as ‘potentially exempt transfers’.

The reason why they are named ‘potentially’ is that you have to survive for seven years after making the gift for inheritance tax to be avoided.

If you die within this time, the gift will be added to your estate, and reassessed against other gifts you have given and your tax-free allowance.

Everyone has a tax-free allowance of £325,000 on their estate before inheritance due is due. If you don’t reach this threshold, including the potentially exempt transfers, then you won’t need to pay the tax.

So, if you had an estate made up of cash and shares worth £250,000 which you gave to your daughter in its entirety last year, she’d have no inheritance tax bill to pay if you died next year, as this amount is under the tax-free allowance.

However, if your estate is larger and your tax-free allowance has been used up against potentially exempt transfers and taxable gifts, this can leave little or no allowance to be used against the rest of the estate.

Taper relief

If tax does become due on a PET, the person who received the PET will be asked to pay the tax. However, the tax may be reduced because of ‘taper relief’. It works like this:

  • If the gift was made less than three years before death, your heirs pay 40% tax
  • If the gift was made three to four years before death, tax is reduced by 20% to 32%
  • If the gift was made four to five years before death, tax is reduced by 40% to 24%
  • If the gift was made five to six years before death, tax is reduced by 60% to 16%
  • If the gift was made six to seven years before death, tax is reduced by 80% to 8%
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