Financial planning tips when gifting assets to children

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Giving children a helping hand financially is laudable, but needs to be approached sensibly, explains Alastair Barbour, partner in investment management at Smith & Williamson.

Rising house prices have exacerbated two problems for many British families: the possibility that the older generation’s assets will exceed the inheritance tax allowance, as well as real difficulties facing the younger generation as they try to buy their own property. Many parents may see a solution to both of these problems in the form of a cash gift to their children or grandchildren to fund a deposit.

The first issue many parents have in later life is funding the cost of retirement, which can be expensive, particularly if long term care is involved. The second issue is whether it is actually a good time for a younger person to buy their own home – while renting property can be seen as money down the drain, it offers flexibility, which is important if the child’s immediate future involves changes, such as a new job or moving in with a partner. If these two issues can be satisfied, then generally a parent helping a child by funding a deposit can be a good way of passing on assets, and so reducing their own estate.

Seven tips for parents when gifting assets to children:

  1. Consider your own future needs carefully. It can be sensible to hold back assets until well into retirement to obtain a realistic view of living costs. For peace of mind, life assurance can be arranged to fund a potential inheritance tax bill while longer-term plans are worked out.
  2. Older does not always mean wiser. Many parents assume that once their children are past their mid-twenties, they will deal with a gift sensibly. This is often not the case – some younger children will be level headed and use a sum wisely, such as to fund a university course, a house purchase deposit or setting up a business, but others may use the amount frivolously.
  3. Prudence can be learnt. Gifts staggered over many years can help the child to develop good financial habits. Recipients will quickly realise that spending the capital could make further gifts less likely.
  4. Building on point 3, if adult children are drawing an income from capital provided by their parents, it may be better to suggest a monthly amount. Ad hoc withdrawals may end up being larger than expected and can encourage reckless spending.
  5. Parents can make pension contributions for their children.  This has the double benefit of securing income tax relief and preventing the recipient from spending the gift in the short term.
  6. If adult children are reasonably well provided for, it can make sense to skip a generation and pass assets directly to grandchildren. Bare trusts and JISAs are both useful, but be aware that children automatically have access as soon as they turn 18.
  7. Keep records of all gifts, ideally with an accountant or lawyer. Many gifts are exempt from inheritance tax after the donor has lived a further seven years. The rate of tax tapers down after three years, so precise records of dates can be vital. Other regular gifts made out of income or those covered by the £3,000 annual exemption or the £250 per recipient small gifts exemption may also be free of inheritance tax. Certain wedding gifts may also be inheritance tax free.

Disclaimer

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

The tax treatment depends on the individual circumstances of each client and may be subject to change in future.

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