Have you ever been given cash from a parent? Perhaps it’s money towards your first house or a long overdue holiday? This would be considered a gift, money that is yours to do with as you wish. A gift is just that - a gift freely given without conditions.
However, gifts that exceed an individual’s annual allowance, currently £3,000 in a single tax year, or £6,000 if the previous tax year’s allowance is unused, can have an impact on the Inheritance Tax position following death. Gifts in excess of the annual allowance will reduce a person’s Nil Rate Band allowance for a period of seven years from the date the gift is made. Although there are some exceptions to this, for example, gifts from a parent to a child towards their wedding or Civil Partnership are exempt up to £5,000.
The Nil Rate Band (the threshold above which Inheritance Tax is payable) for each individual is currently £325,000, under this Inheritance Tax (IHT) is taxed at 0%. Anything over the Nil Rate Band is normally taxed at a rate of 40% although other exemptions and reliefs may apply to reduce this. Spouses or Civil Partners can use each other’s Nil Rate Band allowance to leave a combined maximum of £650,000 before IHT becomes due.
Now, imagine your parent is lending you money, perhaps it’s towards the purchase of a new car or house or that long-awaited holiday. Whatever it is, there is an agreement for the loan to be repaid over a set period of time either with or without interest.
Loans are treated like any other liability on an estate, reducing the value of the estate for IHT. Problems arise when people attempt to disguise a gift as a loan. For example by including terms that the 'loan' is never to be repaid. For a loan to actually be considered a loan there needs to be an intention for it to be re-paid. Otherwise a 'loan' in name only may end up being re-classed as a gift for IHT purposes which could result in an estate paying more IHT.
If you are contemplating making a gift or a loan, you need to carefully consider how it could affect your estate for IHT purposes and we would recommend taking legal advice.
Members of our experienced Private Client team are on hand to advise on any issues relating to the implications of financial gifts and/or loans on Inheritance Tax. Please telephone 01892 526344 or email firstname.lastname@example.org.
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The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.