We would like to help our daughter and son-in-law who have been struggling since the closure: should we give them or borrow the money?
We would like to help our daughter and son-in-law, who have been struggling financially since the start of the lockdown.
However, we are not sure whether to give or lend them the money.
We like to say goodbye to the money if it helps them, but we are not sure about the tax consequences of giving thousands of euros.
Could it possibly affect their legacy if we give them the money now?
Does giving large amounts of money to your children affect their inheritance?
Liz Cuthbertson, tax partner for retail clients at accountants Mercer & Hole, replies: In these difficult and uncertain times, there is financial help that parents can give their children fiscally efficiently.
Cash donations to family members can be particularly tax efficient. There may be consequences for the inheritance tax of making donations, but with careful planning, simple donations can lead to longer-term tax savings.
If a significant amount of cash is needed, a simple downright gift can work very well.
Gifts are known as “potentially exempt transfers” for inheritance tax purposes. To complete a gift it must be unconditional – ie. the parents may not benefit from the funds after donation.
There is no limit to the value of a potentially exempt transfer and no inheritance tax is payable provided that the donor survives a full seven years from the date of the donation.
Liz Cuthbertson, Private Client Tax Partner at accountants Mercer & Hole
Therefore, after seven years, a 40 percent inheritance tax on the value of the donation has been saved.
After three years, a tapering reduction is applied, which reduces inheritance tax on donations. In the event that the donor does not survive the full seven years, some inheritance taxes can still be saved.
In the case of more modest gifts, each individual has an annual exemption of £ 3,000 per tax year.
So, mom and dad could donate a total of € 6,000 to their children per tax year.
Gifts within the annual exemption immediately reduce the estate of the parents and are completely exempt from inheritance tax.
In addition, if they have not used this exemption in a previous tax year, they may only transfer the exemption for one year. So if parents didn’t use their annual tax-exempt donation last year, they can donate £ 6,000 each in the current tax year.
Another tax efficient strategy is that parents make a donation to their excess net income for the year. Provided the conditions are met, the gift is immediately exempt from inheritance tax.
These conditions are that the gift was part of your normal expenses, the gift was made out of income and that the gift gives you enough income to maintain your normal standard of living.
If you live seven years from the donation, no inheritance tax is due
Factors that can be taken into account include the frequency and amount of the gifts, the nature of the gifts and why. Obviously, no one knows how long the economic disruption and consequences will last, but if sustained aid is needed, this relief is worth investigating.
Parents will need to demonstrate that the donation was made from a net income surplus, ideally arising in the year the donation was made, before taking into account previous years.
So if parents have more income than they need and are likely to continue to do so, this relief will likely help.
If parents don’t want to give outright gifts, they can consider lending the money to the kids.
The loan can be interest-free and must be demonstrated with a simple loan agreement. Please note that if the money is not repaid the loan will be considered a gift.
It is worth ensuring that a loan agreement is drawn up with the terms of repayment to avoid any ambiguities. There must of course be an intention to repay the loan from the beginning, otherwise it will be considered a gift from the start.