My wife and I want to give money to our two granddaughters to use on university fees or a house deposit when they are older. They are currently five and two years old.
If we give them each £50,000 from a joint bank account, how would the gift tax work if one of us dies in the next seven years?
Does the corresponding tax apply to the first death or the second, given that the money comes from a joint account?
How can we ensure they get as much of this money as possible? MD, by email
SCROLL DOWN TO FIND OUT HOW TO ASK HIS FINANCIAL PLANNING QUESTION
Passing on your estate: The seven-year rule allows gifts to be tax-free if you live seven years after making them
This is Money’s Harvey Dorset responds: Inheritance tax is charged at 40 per cent on the nil rate of £325,000.
So it’s understandable that you might want to protect your granddaughters from having to endure some of this as a result of giving them gifts now.
As you mention, if you both live seven years after making the donation, this will not be a problem since the money will be tax-free.
In terms of how tax would be applied to money leaving your joint account, the answer is simply that the gifts would be split between you and your wife in the event that one of you dies within seven years, meaning £50,000 of each one. of your properties.
This means that £50,000 of the two gifts would be subject to inheritance tax if they are not included in your allowance.
However, when calculating inheritance tax, there is a specific order in which the nil rate band is applied. Lifetime gifts made within the seven years before your death are the first component that exhausts the nil rate band.
Of course, this means that other parts of your estate will be outside the nil rate band if one of you dies.
However, if the entire estate is left to a person’s partner upon their death, then it is not subject to inheritance tax.
This also means that the surviving partner would have a zero rate band of £650,000.
However, it is still advisable to ensure that your potential for IHT liability is as low as possible.
As our experts mention below, your gift allowance can mitigate the amount of inheritance tax charged on your estate.
If it was not used in the previous year, a year’s allowance can also be renewed, bringing it to £6,000.
Altogether this reduces total donations to £88,000 instead of £100,000. You can also use your allowance for gifts of £3,000 each year until your death, as well as gifts of £250 to anyone else on top of this.
This is Money spoke to two financial advisors to find out how you can transfer as much of this money as possible without feeling the pain of inheritance tax.
Better returns: Richard Allan says investing the money could make it grow when the reader’s granddaughters access it.
Richard Allan, director of financial planning at Schroders Personal Wealth, responds: It’s a great position and I’m sure your two granddaughters will be very grateful.
When you donate money from your joint bank account, half of the donation is generally considered to be made by each of you.
If one of you dies within seven years of making the gift, you would potentially eat up some of your individual nil rate band (NRB) or be subject to Inheritance Tax.
The NRB is a threshold below which the estate does not incur inheritance taxes.
We each have an NRB of £325,000 on death and top taxes can be 40 per cent.
You should take into account any other gifts given before this gift to your granddaughters, as this may affect any tax that may be payable.
If the deceased’s estate is above the nil rate band, their share of the gift (£50,000) could be subject to tax.
If you have made previous donations and the total value of the donations exceeds £325,000, a gradual reduction may apply. If death occurs between three and seven years, donations that exceed the nil rate band are reduced over time.
One of the allowances you have is the annual gift allowance, which allows you both to make a gift of £3,000 each year, without being affected by the seven-year rule and the potential 40 per cent tax charge.
Gifts to your granddaughters could be part of the previous year’s annual gift allowance if no gifts were made in that tax year.
As your intention is for the gifts to be used in the future to pay university fees or a house deposit, it is unlikely that you will need to access the money for more than 10 years.
This being the case, it may be appropriate to take investment risks for potentially better rewards; However, this is not guaranteed as the value of investments may rise or fall.
This could be achieved in a managed fund that is diversified across a range of different assets, to spread the risk.
Before the child reaches the age at which funds are to be distributed, the risk may need to be reassessed.
You may want to consider doing a tax-efficient mix of savings and investments and using a Junior Isa for each granddaughter.
The money is kept for them until they turn 18 and then it becomes theirs to decide what to do with it.
There is an annual limit of £9,000, so it could take a few years to invest the full £50,000 each.
These could be used in combination with Premium Bonds. Although premium bonds do not have a fixed return, they participate in a monthly draw which, if you win, can give you an average tax-free return in line with a savings account and could act as a safe home for uninvested cash before the annual Isa investments. They are done.
If you have reservations about your granddaughters having access to money at age 18 and want some control over when the money will be given to them and how they will use it in the future, you may want to consider a trust agreement to hold an investment such as a bond or fund. investment; However, trusts are generally more complex than a JISA or premium bonds, as there may be tax charges when setting up the trust, during the life of the trust and when exiting the trust.
Whichever option you consider, it may be appropriate to seek professional advice to help you make the right decision.
Shelley McCarthy says a trust could help ensure her granddaughter sees as much money as possible
Shelley McCarthy, financial planner and CEO of Informed Choice, responds: If you were to donate £50,000 each from a joint bank account, you would first be able to offset your annual gift allowance of £3,000 (assuming you haven’t made any other donations).
If you have not made a gift in the previous tax year, you will be able to transfer an additional £3,000 each.
This means the value of each gift could be reduced to £44,000 each from an Inheritance Tax (IHT) point of view.
If you survive seven years, this would be outside your estate for IHT purposes, under current law.
If one of you died within seven years, half the value of the gift would normally revert to the IHT estate.
This would use some of your £325,000 nil rate band, again assuming no other donations have been made.
So, in this example, the nil rate band available to offset the remainder of the estate would be reduced by £44,000 to £281,000.
If you are fortunate enough to have income that exceeds your expenses, gifts from income that do not reduce your standard of living may also be free of inheritance tax, but such gifts are usually paid out on a regular basis, so it may take some time. time to incorporate them. a decent lump sum.
If he died within seven years, there would be no impact from IHT’s point of view.
In terms of ensuring that your granddaughters get as much of this money as possible, you can donate an amount to a ‘naked’ (or absolute) Trust and again these payments will constitute a gift (a potentially exempt transfer) which could be subject to tax the inheritance if you die within seven years after making the gift.
Your granddaughters won’t be able to access the money until they turn 18 (or get married before that age).
They can appoint themselves trustees if they want to be able to control what happens to the money before the granddaughters receive it.
As your granddaughters are so young and have plenty of time left before having to pay university fees or buy property, you may want to consider investments that have good capital growth prospects rather than deposit-based savings.
Both can also contribute to the ISA Junior for girls. They can invest £9,000 per year in junior ISA accounts.
The money in these accounts cannot be accessed until they turn 18. Only parents or guardians can open such an account, but once opened the money can be deposited.
Although the money comes from a joint account, the payments will be individual gifts from the two of you.
Keep records of gifts and any allowances/exemptions claimed, so that the executors of your estate are aware of them when administering your estate.
Some links in this article may be affiliate links. If you click on them, we may earn a small commission. That helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.
