Navigating Financial Gifting and Inheritance Tax

Research conducted by Legal & General in the first half of 2024 reveals that 40% of buyers under 55 relied on financial help from family members to purchase their homes.

While contributing to a house deposit is often the primary focus, family support—dubbed the "Bank of Mum and Dad"—extends to other expenses like weddings, childcare, and everyday bills. Notably, it's not just parents providing this assistance.

With the ongoing cost of living crisis, families should assess their gifting strategies to ensure that any support provided is both effective and financially sustainable. There are many ways to offer practical and meaningful assistance without necessarily giving money. This guide begins by exploring gifting options related to the property ladder and inheritance tax (IHT) implications before delving into non-financial alternatives.

Financial Gifting and Inheritance Tax Awareness
When making financial gifts, it’s essential to be mindful of IHT considerations:

If you pass away within seven years of making a financial gift, it may be subject to IHT and form part of your estate. Keeping records of gifts can help ease the process for those managing your estate.
Annual IHT gift allowances exist and should be factored into your planning.

Practical Gifting IdeasContribute to a Pension
You can contribute to a personal pension for a loved one. For example, a £2,880 contribution benefits from £720 in tax relief, resulting in a gross contribution of £3,600.
Boost a Mortgage
Helping a loved one secure a property can involve a lump sum, regular income, or multi-party mortgages. In a joint-borrower, sole-proprietor arrangement, a parent can join the mortgage without being on the property deed, avoiding stamp duty and capital gains tax implications.

Example: Chae and Cem, with help from Chae’s mother and stepfather, used this approach to purchase a £465,000 property in East Finchley, London. The family collaboration allowed them to live near loved ones while managing affordable monthly payments.
Lifetime ISA Contributions

The Lifetime Individual Savings Account (LISA) enables individuals aged 18 to 39 to save up to £4,000 annually, earning a government bonus of up to £1,000 per year. This can be used for a first-home deposit on properties worth up to £450,000.
Equity Release for Over-55s
Equity release allows homeowners to unlock tax-free cash from their property while continuing to live there. This option, typically via lifetime mortgages, provides flexibility but may affect means-tested benefits or tax positions. Products like Legal & General’s Optional Payment Lifetime Mortgage let borrowers repay interest to control loan growth. However, it’s crucial to understand the implications, including IHT considerations.

Example: Evadne, a 72-year-old, used equity release to help her son buy a home. By paying the interest monthly, her son ensures the loan amount remains stable, preserving future inheritance.

Final Considerations
When providing financial support, ensure you prioritise your financial security, considering potential future costs such as home maintenance or healthcare. Always seek independent advice, research thoroughly, and leave room for reflection before committing to significant decisions.

Non-financial gifting ideas and additional resources are also available, offering alternative ways to support loved ones without financial strain. This guide is a starting point to help navigate the complexities of giving and receiving support effectively.

Understanding Inheritance Tax (IHT)
Now that we’ve explored gifting ideas and how IHT might impact them, let’s dive deeper into how inheritance tax actually works. Understanding IHT is becoming increasingly important, as rising property values and the ongoing freeze of the IHT threshold mean more people are likely to face this tax. Alarmingly, many individuals remain unaware of how much IHT their families may owe after their passing—or whether it will apply to them at all.

What Is Inheritance Tax (IHT)?
IHT is a tax levied on the value of your estate—this includes cash, property, investments, possessions, and any life insurance payouts—when you die. The tax applies if:

Your total estate exceeds £325,000, known as the Nil Rate Band (NRB).
The beneficiaries of your estate are not exempt (e.g., they aren’t a spouse or civil partner).
Key IHT Allowances
Nil Rate Band (NRB):
If your estate’s value is below £325,000, no IHT is due. If it exceeds this threshold, the amount above it may be taxed at up to 40%.
Residence Nil Rate Band (RNRB):
An additional £175,000 allowance is available if you leave your home to your direct descendants (children, grandchildren, stepchildren, foster or adopted children).

Together, the NRB and RNRB can give you a combined tax-free allowance of up to £500,000.
Spouse or Civil Partner Exemptions
If you’re married or in a civil partnership and your partner is UK-domiciled, they are exempt from paying IHT on anything you leave to them. Additionally, any unused NRB or RNRB from your estate can be transferred to your spouse or civil partner. This means that upon their death, they could have a combined IHT-free allowance of up to £1 million.

Why Understanding IHT Matters
As property prices continue to rise and thresholds remain static, more estates are crossing the IHT threshold. Proper planning can help reduce or eliminate the IHT burden for your family, ensuring that your legacy is preserved as much as possible. Keep these considerations in mind:

Document Your Gifting: Gifts made during your lifetime could become part of your estate if you pass away within seven years. Maintain a clear record to help those managing your estate.
Leverage Allowances: Ensure you take full advantage of both the NRB and RNRB, as well as annual gifting allowances.
Seek Professional Advice: Financial advisors can help optimise your estate planning, balancing your current financial security with your desire to provide for loved ones.
By understanding and managing IHT effectively, you can ensure your generosity benefits your family while minimising unnecessary tax liabilities. Always consult professionals for tailored guidance to suit your unique circumstances.