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Inheritance Tax & Grandparents

New studies have found that Grandparents could increase the financial benefits and legally reduce the effects of Inheritance Tax of their inheritances by thousands when gifting monies before their death.

The study highlights the effect of tax and investment returns in relation to giving money in the form of testamentary legacy versus gifts given from surplus income, whilst alive instead of waiting until death by making use of a range of tax perks to increase the value of the legacy.

For example, if a grandparent was to make regular gifts of £500 per month out of surplus income to her grandchild a significant pension pot in excess of £100,000 could be grown by the time the grandchild turned 18 at no IHT cost to the donor.

So, what concerns people about giving money away before their death ?

• Lack of awareness on the financial benefits of giving money away before death.

• Concern about paying for care (Councils have the power to penalise older people if they think they have given money away in order to avoid paying for their care: anyone with assets worth more than £23,250 must pay for their own care in full.)

• The worry surrounding giving large sums of money to younger individuals.

What is Inheritance Tax?

When you die, the Government assesses how much your estate is worth, then deducts your debts from this to give the value of your estate. Your assets include:

• Cash in the bank

• Investments

• Any property or business you own

• Vehicles

Your estate will owe IHT tax at 40% on anything above the £325,000 inheritance tax threshold when you die (or 36% if you leave at least 10% to a charity.)

When will you not be affected by IHT?

• If your estate is below the current nil rate band (currently £325,000 per person or £650,000 [ rising to £1m in certain circumstances by 2020] for a spouse whose partner has predeceased them and not used any of their own allowance themselves).

• On gifts made seven years or more before death.

• On gifts within your annual allowance (currently £3,000.)

• On small gifts that amount to no more than £250 each within a year.

• On gifts on the occasion of marriage (subject to limits).

• On regular gifts out of your ordinary income that do not diminish your capital or reduce your standard of living.

Possible Government Future Plans

It has been reported that the Government may establish tax breaks for older people who give their funds to grandchildren both throughout their lifetime and in their will. An existing tax break reduces inheritance tax by four percentage points if at least 10% of the estate was left to charity.

Another concept would permit contributions towards tuition fees to be considered as charitable donations. As universities are set up as charities, this would be fairly simple to organise, and would allow grandparents to fund their children’s university fees with the contributions being free from inheritance tax.

The Government could also make contributions to Junior Isas and children’s pensions immediately outside an estate, meaning they will not be subject to inheritance tax. At present, these are treated in the same way as other gifts, meaning they are only free of inheritance tax if the giver dies after seven years has passed.

Until such measures are introduced we can give specific advice on how to use the existing planning tools of using regular gifts out of surplus income which immediately renders such gifts outside the scope of IHT.

Money Saving Expert, Telegraph, BBC, Saga