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I plan to make a £25,000 gift to my granddaughter as her wedding present. This will also be part of her inheritance. Will she have to pay tax on this?
Elizabeth Neale, partner in the private wealth department at Bircham Dyson Bell, says the good news is that there will be no inheritance tax (IHT) to pay when the gift is made. The bad news is that there may be IHT to pay on part of the gift in the future.
Part of the gift will be exempt from IHT, but the balance will be a potentially exempt transfer (Pet) and will become taxable if you die within seven years of making the gift. Whether or not there is tax to pay will depend on the other gifts you have made and the tax rates and allowances at that time.
Two IHT exemptions are relevant. The first is the marriage exemption. A gift of up to £2,500 by a grandparent to a grandchild made on or shortly before the grandchild’s marriage, which is conditional on that marriage taking place, will be exempt from IHT.
The second is the annual exemption. Everyone has an annual allowance of £3,000 which can be given away tax free. If you have made no other gifts in the current tax year, a further £3,000 of the gift will be exempt. This exemption can be carried forward for one year. So if no gifts were made in the previous tax year another £3,000 will be exempt.
These rules mean that up to £8,500 of the gift will be exempt from IHT. The balance of the gift will be taxable if you die within seven years and any tax would be for your granddaughter to pay. Under present rules, IHT would only be payable if the total of your taxable lifetime gifts exceeds the nil-rate band at your death. The nil-rate band is £325,000 and the maximum rate of IHT above this is 40 per cent. This rate reduces for gifts made more than three but less than seven years before death.
If you do not want your granddaughter to pay any IHT on this gift, you could include a legacy to her in your will of the amount of IHT payable. That legacy would be taxable but if IHT is payable on your estate, it would not increase the overall IHT liability. Otherwise, you should warn her that she could have up to £9,000 of tax to pay if you were to die in the next three years. Your will should also make it clear whether or not this gift is to be brought into account when determining her inheritance on your death.
Stuart Price, associate at Thomson Snell & Passmore, says he is sure your granddaughter will be delighted with the gift. However, HM Revenue & Customs looks very carefully at lifetime gifts because sometimes IHT can become payable on them. The rules allow grandparents to make a gift of up to £2,500 to a grandchild on the occasion of their wedding, which will always escape the IHT net.
You can also make gifts of capital totalling up to £3,000 a year (£6,000 if you have not used up last year’s allowance, but we can ignore this for now). You are left then with a gift of £19,500 that is potentially exposed to IHT.
Your granddaughter will not have any immediate liability to pay tax. However, if you do not survive for seven years from the date of the gift, your granddaughter may need to pay IHT on £19,500. Whether she has to do so will depend on whether your estate is large enough to suffer IHT and whether you have made gifts that exceed the allowance available to you on death (currently £325,000) before the gift to your granddaughter and you die within seven years of them.
This might come as a shock to your granddaughter, especially if she has spent all of the money. If this is a possibility, you can change your will to shift the burden of the tax on to your estate.
You mention that the gift will form part of your granddaughter’s inheritance and so I assume that you have made a will under which she also inherits to some extent. If you do not have a will, you should take appropriate advice and draw one up as soon as possible. If you die without a will, your estate will pass in accordance with the intestacy rules which will often result in your assets passing to somebody you did not expect or wish to inherit.
If you have other grandchildren for whom you are also making provision, your will should include a “hotchpot” clause. This provides that if you make a lifetime gift to somebody, and that person is also a beneficiary in your will, that gift should be brought into account against that person’s inheritance. This avoids inequality, which is important as family warfare has started over far less. Helpfully, if you decide to make further gifts to your grandchildren, whether that be to mark another family occasion or for IHT planning purposes, all of the gifts will be taken into account and you will not need to amend your will again.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to firstname.lastname@example.org
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