With the Bank of Mum and Dad now one of the biggest providers of finance in the UK, the subject of gifting or giving money away has never been more prominent.
Yet gifting can be troublesome or riddled with financial threats. Or we could reverse that and say that gifting can present opportunities for good financial planning.
Here are some thoughts about gifting which may highlight these points:
- Gifts to children, for example to help with the purchase of a property, could be affected by a divorce of the child, with part of the gift ending up in the hands of the child’s ex-spouse. This could happen even within a couple of years. This can be countered by the use of a trust mechanism, whereby the gift is made to the trust with the child as a beneficiary and then the trust lends the money towards the house purchase. Although, note, this may affect the mortgage available to the child and his/her spouse.
- Many people wish to make gifts in later life to reduce Inheritance Tax (IHT), but don’t want to lose control of the money, or are worried about not living seven years. The use of a suitable investment, which qualifies for Business Relief, may offer a solution, as such investments are free of IHT after two years. And in the case that the funds are needed they are still available to the investor(s). Note, however these schemes can be considered higher risk than many other investment types.
- Parents or grandparents wish to help beneficiaries with school fees or university fees; can these be paid direct to the child as a gift to utilise tax allowances or the annual gifting allowance or gifts out of income (both free of IHT potentially)? Or should the fees be paid directly by the parents/grandparents?
In each case the most prominent aspect of the situation is that there are often competing ways to achieve the same end, with different pros and cons. Weighing these up and working out how best to structure a gift or extending help requires careful appraisal. Balancing the financial and tax positions, aligned with lifestyle threats (e.g. unforeseen healthcare costs, divorce of a child) suggests that specialist advice can play a crucial role. A well-qualified and experienced independent financial adviser will have the knowledge of the tax rules, trusts and risk management to provide advice towards the suitable way to handle any requirement of this sort.