Many people choose to help their children or grandchildren with the cost of living, but this generosity could be included in tax calculations, Martin Lewis warned
Financial specialists have drawn attention to a ‘£3,000 rule’ for anybody providing financial assistance to relatives. Many family members, particularly those in their later years with additional disposable income, frequently choose to help their children or grandchildren with the rising costs of modern life.
However, this generosity could be factored into inheritance tax calculations. Finance experts at AJ Bell explained in September: “Some gifts do not have IHT consequences. There is an annual exemption of £3,000 per person making the gift – so Mum could give one child £3,000 annually, whilst Dad gives the other child the same; these would always be outside the estate. Any unused portion of the £3,000 can be carried forward for one year.
“Small gifts of up to £250 per recipient are also exempt – although this cannot be to the same person as any of the annual exempt gift. Gifts can take the form of either cash or assets, so out of the £250 would come things like Christmas and birthday presents.
“Wedding gifts of £5,000 to a child, £2,500 to a grandchild, and £1,000 to anyone else are also exempt. You can combine this allowance with the annual allowance for gifts, but not the small exemption.”
Well-known personal finance expert Martin Lewis has previously issued an important warning to those offering financial support to family members. During his BBC Podcast, the money-saving guru addressed the subject of inheritance tax, reports the Express.
At present, individuals can generally pass on up to £325,000 (known as the nil-rate band) free from taxation upon death, rising to £500,000 when leaving a main residence to direct descendants. An unlimited amount of assets can be transferred to a spouse, civil partner or charity entirely free from Inheritance Tax (IHT), with any unused allowances being transferable.
A married couple can leave up to £1 million tax-free – made up of two £325,000 tax-free allowances and two £175,000 main residence allowances. To benefit from this arrangement, the couple must be legally married.
Beyond this threshold, the inheritance tax burden can be reduced through gifting. However, strict rules govern this process and how it works.
There is also a time limit in place, meaning any gifts made seven years or more before death are not liable for tax. Martin asked Lucie Spencer from Evelyn Partners to outline all the available gift allowances.
He said: “There’s a £3,000 rule isn’t there?” Lucie explained: “So there’s the large gift allowance, which is £3,000 per individual per tax year. And what that means is I can give £3,000, my large gift allowance, either to one person or split between multiple people and also I could reclaim a tax year as well, so if you haven’t given that £3,000 in the last tax year, you can effectively give £6,000 today.”
Martin asked: “So this is so people understand. This is outside of the 7-year rule. Outside of the giving money from surplus income rule. You, as an individual, can give up to £3,000 per tax year without paying inheritance tax. How do you denote that you’re using this large gift allowance? Do you have to note down that’s what your intention was or is it just back count?”.
Lucy advised: “I recommend with all gifts and that’s the small gift allowance of the £250, the large gift allowance of the £3,000 or any gifts are written down on a piece of paper or a spreadsheet and held with your will because when someone passes away and you come to complete their inheritance tax form there’s actually a whole list where you have to detail all of the gifts which you’ve made leading up to your death.
“So definitely make a note of it and put it in one column and put ‘large gifts allowance for this tax year.'”. To summarise, Martin noted: “I can give money from surplus income, I can give money away as long as I last 7 years as a gift without restriction. I can give £3,000 to as many people. The maximum I can give is £3,000, but I could share that between different people. What’s the £250 rule?”.
Lucy explained: “So the £250 rule effectively I could stand on a street corner and give £250 to as many people as I wish. What I can’t do is give a person £1 more. So Martin, if I were to give you £250 in this tax year, what I can’t do is come back to you and say ‘have another £50 on top of that’.”
Martin asked how this interacted with the £3,000 allowance. Lucy clarified: “The person who has been given the £3,000 you can’t then give them £250. The way I look at it is you give your daughter £3,000 and your grandchildren £250.”
Martin then asked: “At what age would you say it is sensible for people to start keeping notes on all this type of stuff?” Tax barrister Harriet Brown suggested: “Early 40s.”
Lucy offered: “I would say in your 50s. Maybe when you’ve received an inheritance so your wealth is more.”
There are also special occasion exemptions available when gifting money, allowing family members to make financial contributions towards weddings without incurring any tax implications.
Harriet explained: “You’ve got gifts in relation to marriages or civil partnerships, where a parent of either party to the union can give £5,000, so if all four parents gave the maximum, that would be £20,000. Other people who are relations, such as grandparents, could give £2,500, and anyone else could give £1,000 on the occasion of marriage. grandparents, could give £2,500, and anyone else could give £1,000 on the occasion of marriage.”
To listen to the full podcast click here. For the Martin Lewis Money Saving Expert advice on inheritance tax click here.
