Lowes Inheritance Guide (Old)

LOWES INHERITANCE GUIDE

2 Gift or loan?

When it comes to passing on wealth to the next generation, there are two broad approaches to consider; giving money away as a gift, or making a loan. Both ways of giving an inheritance during your lifetime have advantages and disadvantages to consider. There are also some important tax considerations.

With incredibly high property prices, it’s no surprise that adults often turn to ‘the Bank of Mum and Dad’ for financial support. Making a gift to adult children can be subject to a 40% tax charge, depending on when the person making the gift subsequently dies. Gifts tend to be classified as a Potentially Exempt Transfer, commonly referred to as PET. A common misconception is that this form of gift reduces the tax charge applied to the gift, on a sliding scale, over seven years from the date the gift is made via a dispensation called taper relief. Taper relief, however, only has a benefit where the gifts are significant to the extent that they together with other gifts, exceed the inheritance tax nil rate band (NRB) which is currently £325,000. Where this is the case if the person making the gift dies within three years, then the 40% tax charge applies, but the effective tax charge reduces to 32% after three years, and then down to 8% after six years, before falling to zero after seven years. Where total gifts are below the nil rate band, the seven year clock is still important

as gifts (beyond specific exemptions covered later in this guide) will potentially use up some of the nil rate band. An alternative to gifting money is to make a loan.Thisapproachcancomewiththehope of receiving a repayment at some point, and means you get to keep some control of the money, rather than giving it away entirely. A loan could still count towards inheritance tax, as it will be included as part of your taxable estate when you die. It is possible to start as a loan, later waiving the debt and making a gift, but be aware that the seven-year clock starts ticking from this point for tax purposes. When lending money instead of gifting, it’s essential to make it very clear to all parties involved that themoney is a loan. It’s better to think at the outset about all possible outcomes, including if your children cannot afford to make repayments. Always get this inwriting tomake the terms and any conditions very clear. Having a written agreement in place is also very helpful when it comes to subsequent estate management.

Lowes.co.uk

Personal Finances Cared for Personally