Warning as families gift cash to beat Hunt’s inheritance tax grab: 'You won't get it back'

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Making gifts to loved ones can help reduce your estate’s liability to pay inheritance tax, but there is a risk. Generous parents and grandparents risk leaving themselves short of cash in later life as a result.

By planning ahead, you can prevent HM Revenue & Customs from becoming your biggest beneficiary, says Rachael Griffin, chartered financial planner at Quilter. 

“Making gifts can help loved ones survive the cost of living crisis and also shrink the size of your estate for IHT purposes.”

Gifting is complicated, though. While it’s natural to want to help younger family members get on, you have to ensure your own finances remain robust as you get older.

Here are five mistakes to avoid or risk going bust yourself. 

1. Gifting too much cash. Before sharing your wealth, make sure you have enough income to last your retirement.

You don’t want to be generous today only to run out of money in later life.

Calculating whether your income will last the course is hard, especially if you leave your pension invested via drawdown, as it’s future value will be at the mercy of the stock market.

Once you have gifted cash, it’s hard or impossible to ask for it back.

2. Having no money for social care bills. An even bigger worry is that you will need nursing home care in later life, but lack the funds to pay for it. 

The average nursing home charges £888 a week, or £46,176 a year, according to CareHome.co.uk. Some charge much more.

You might struggle to fund these costs if you have given most of your money away.

Local authorities will only step in to cover the cost once your wealth has dwindled almost to nothing, and that includes the value of your home.

3. The recipient gets divorced. Another risk is that you give money to a beloved family member who later divorces, so their partner walks away with half of the cash. 

Alternatively, they could die unexpectedly so your gift passes to a spouse or civil partner who you may not like or trust.

READ MORE: Hunt considering hated ‘death tax’ to fill financial black hole

A good way of maintaining some control of a gift is to pass it on via a trust. With a bare trust, the beneficiaries are named and fixed, but the money may still be at risk in case of divorce or bankruptcy. 

With a discretionary trust, the funds are excluded from divorce settlements and creditors.

Gift made inside a trust will only fall entirely out of your estate for IHT purposes if you live for another seven years.

4. That money could be frittered. Think carefully about how the recipient will treat your hard-earned money.

While many will be sensible, others could fritter it away.

If you fear your cash will be spent frivolously, you get round that by paying it into a pension instead.

That way the money will stay locked up until the beneficiary can access their pension. With luck, they will have learned the true value of money by then.

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Younger people may have more immediate needs so you could consider options such as funding private school fees or saving for a specific goal such as a property deposit.

5. Get your sums wrong and face an IHT bill anyway. Every adult can gift a maximum £3,000 each year with no IHT to pay, so couples could gift £6,000 this tax year. 

You can mop up unused allowance from last year, potentially doubling these sums.

You can make smaller IHT-free gifts of up to £250 per person, provided the beneficiary has not enjoyed the £3,000 exemption.

If one of your children is getting married, you can gift them £5,000 free of IHT. You can also gift £2,500 to a grandchild or great-grandchild on marriage, and £1,000 to another relative or friend.

A little-known option is to make regular payments to help with another person’s living costs, known as “normal expenditure out of income”. 

Any further gifts are known as potentially exempt transfers and will only be IHT-free if you live for another seven years.

So your estate could pay IHT on the money anyway, although possibly at a lower rate as the 40 percent IHT charge falls on a sliding scale during the seven-year period.



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